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DCF Simulation

I ran simulation of DCF cashflows with uncertainty in inputs. For this, I have taken basic RISK Model as a reference.

Uncertain Inputs

In this model, the following inputs are uncertain:

  1. Investment cost

  2. Year 1 revenue

  3. Annual fixed cost

  4. Annual revenue growth rate

  5. 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.

Simulation Details

  1. Number of Iterations 5,000

  2. Cashflows: 10 Years

  3. Fixed Discount Rate of 12%


RISK Tool by Palisade (Academic Version) on MS Excel.

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