What is essential to do with the results of DCF Analysis?

Testing and checking for errors and reasonableness is essential to ensure that the results of Discounted Cash Flow (DCF) analysis are reliable and valid. DCF analysis involves forecasting future cash flows and discounting them back to present value, which requires precise calculations and sound assumptions. Errors in this analysis can lead to significant misjudgments in valuation. By testing the methodology, assumptions, and calculations, appraisers can identify any discrepancies or unrealistic projections, thereby confirming that the results are representative of a reasonable range of values.

This process involves examining the inputs used in the DCF model, such as growth rates, discount rates, and estimates of future cash flows, to validate their accuracy and applicability to the specific property or investment being evaluated. A critical assessment also includes determining whether the results align with market conditions and comparable data. This step is vital for maintaining a high standard of professionalism and credibility in appraisal practice, as emphasized by USPAP guidelines.