How accurate are DCF models?

The Discounted Cash Flow model is one of the most useful and commonly used valuation methods for businesses. It gives the investor a Net Present Value (NPV) of all future free cash flows expected into a company.

But just how accurate is it? It models earnings growth as stable but in reality it is usually very volatile. I decided to test how volatile earnings can affect the values given by DCF models and whether crude estimates investors usually use to account for this are sufficient.

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