Assume that the correct future cash flow is $100 and the correct Discount rate is 10%. Consider the value effect of a 5% error in cash flows and the effect of a 5% error in discount rates.

1. Graph the valuation impact (Both in absolute values and in percent of the correct up-front present value) as a function of the number of years from one year to twenty years.

2. Is this an accurate real-world representation of how your uncertainty about your own calculations should look? in other words, is it reasonable to assume a 5% error for cash flows in twenty years? For the appropriate discount rate applicable to twenty-year cash flows?

Answer rating: 100% (QA)

1 Discounted cash flow DCF is a valuation method used to estimate the value of an investment based ... View the full answer