Discounted Cash Flow (DCF) – part 2

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DCF Positives and Negatives

Positives:

Based on cash flow generation potential of business
Not influenced by temperamental market conditions or non-economic factors
Negatives
PV obtained sensitive to assumptions and methodology
Involves forecasting future performance
If terminal value is more than 50-60% of total (enterprise) value, DCF is less reliable since much of value is driven by assumptions about how much the business is worth in the future