What is the primary purpose of a DCF analysis?

The primary purpose of a Discounted Cash Flow (DCF) analysis is to estimate the value of an investment based on its expected future cash flows. DCF analysis focuses specifically on calculating the present value of future cash flows generated by an asset, project, or business, allowing investors to make informed decisions about its worth. This methodology accounts for the time value of money, which recognizes that a dollar received in the future is less valuable than a dollar received today due to factors like inflation and opportunity cost.

By projecting future cash flows and discounting them back to their present value using an appropriate discount rate, DCF analysis provides insights into whether an investment is undervalued or overvalued compared to its market price. This makes it a vital tool for investors, analysts, and corporate finance professionals when making valuation assessments and investment decisions. The other options, while important in their own contexts, do not capture the essence of DCF analysis as it relates to estimating value through future cash flows.