In the context of discounting cash flows, why is it important to choose a growth rate less than GDP?

Choosing a growth rate less than GDP is crucial for ensuring reasonable future cash flow projections. When projecting cash flows, the growth rate should reflect a realistic and sustainable expectation of a company's future performance. If the growth rate exceeds GDP, which represents the overall economic growth of the country, it suggests that the company is expected to grow faster than the economy indefinitely. This scenario is often unrealistic, as it is difficult for any single company to consistently surpass the broader economic growth over the long term due to competitive pressures and market saturation. By selecting a growth rate that is less than GDP, analysts can create more conservative and credible forecasts, reducing the risk of overestimating a company’s potential and leading to erroneous investment decisions. This approach provides a more prudent basis for valuing cash flows and supports more reliable long-term financial analysis.