I ran simulation of DCF cashflows with uncertainty in inputs. For this, I have taken basic RISK Model as a reference.
In this model, the following inputs are uncertain:
Year 1 revenue
Annual fixed cost
Annual revenue growth rate
Annual variable cost percentage
Meaning of uncertainty in this context
For example, you may estimate average growth rate to be 5% but in reality there will always be certain variation right? it may have a standard deviation of up to +/- 2% (example) based on historical forecast errors. Here you might go for a normal distribution.
The decision of what distribution to consider for what parameter depends on the context.
Similarly, you may estimate the 1st year revenue to be within a particular range say Rs. 75k to Rs. 125k but somewhat near to Rs. 1.15 Lakh. Here you may go for Triangle Distribution.
Whenever there is uncertainty, we need to choose a suitable distribution for each input and then run a simulation "n" number of times to know the final range of output within certain level of confidence.
Number of Iterations 5,000
Cashflows: 10 Years
Fixed Discount Rate of 12%
RISK Tool by Palisade (Academic Version) on MS Excel.