While discounted cash flow analysis is the best method available for assessing the intrinsic value of a business, it has several limitations. One ISSUE is that the terminal value represents a disproportionately large AMOUNT of the value of the total business, and the assumptions used to calculate the terminal value (perpetual GROWTH or exit multiple) are very sensitive. Another issue is that the discount rate used to calculate net present value is very sensitive to changes in assumptions about the beta, risk premium, etc. Finally, the entire forecast for the business is based on OPERATING assumptions that are nearly impossible to PRECISELY pin down.

While discounted cash flow analysis is the best method available for assessing the intrinsic value of a business, it has several limitations. One issue is that the terminal value represents a disproportionately large amount of the value of the total business, and the assumptions used to calculate the terminal value (perpetual growth or exit multiple) are very sensitive. Another issue is that the discount rate used to calculate net present value is very sensitive to changes in assumptions about the beta, risk premium, etc. Finally, the entire forecast for the business is based on operating assumptions that are nearly impossible to precisely pin down.