Don't you just love these models. These are my thoughts on DCF...

Don't you just love these models. These are my thoughts on DCF modelling being used on a startup company having a high degree of uncertainty.

About as useful as a hip pocket in a singlet. IMO.

When are they of any use.

1. When they give you the result you want, and/or
2. When the results are so extreme that you had better have another look at the fundamentals of the company and/or the input to the model.

It takes great skill, knowledge, and a bag of intuition to get the input variables anywhere near appropriate.

It is a super sensitive analysis.

The skilled operator can identify the sensitive spots and then tweak the input variables to the extremes while just staying within limits of the parameters which won't raise any red flags.

I surrender to the following quote from The Motley Fool

Limitations of IRR

While IRR is useful for financial professionals, it only considers cash flows. IRR calculations don't take into consideration the accuracy of the cash flow projections or other risks related to the proposed project.

A famous investor once said that a project's NPV is like the Hubble Telescope -- adjusting your position by an inch can land you in a totally different universe. IRR has essentially the same limitations.

J L.