![]() ![]() The main drawback of this approach is that it is heavily dependent on estimates about future cash flows. There are a few limitations of the DCF financial model that are worth noting. The discounted cash flow method is widely used because it gives a reasonable way for investors to compare the value of their potential investments with the current market value of the company, stock, bond, or property. There is, therefore, no flawless approach, but the more robust the method, the better the values it can produce. There are some limitations with this method, and these are discussed next.Īny financial model of evaluating an investment relies on estimates and different pieces of data. The DCF value can be compared to what the investment is currently selling for to see if it is a worthwhile opportunity. The better the numbers, the best the valuation is going to be. ![]() When the investment is a bond, then “r” represents the interest rate on this bond.Īs you can see, various pieces of financial data must be put together to calculate the discounted cash flow value. The WACC gives a value for the investors’ expected rate of return when investing in a company. When evaluating a potential investment in a firm, the weighted average cost of capital (WACC) is commonly used as the discount rate.
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