"DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!"
He defines "the consistency test" for DCF:
- Unit consistency
- Input consistency
- Narrative consistency
"Many of the DCFs that I see passed around in acquisition valuations, appraisal and accounting don’t pass these consistency tests. In fact, at the risk of being labelled a DCF snob, I have taken to classifying these defective DCFs into seven groups:"
Followed by the seven DCF groups and their description. The following picture gives some insights:
From the above we can see that there are many pitfalls in making a correct DCF. That is a serious problem with DCF.
But I think there is an even larger problem: dishonesty from the side of the DCF modeller. In the Malaysian context (and may be even in the global context), that is in my opinion a huge problem.
I will detail my reasons for this in a subsequent posting.