What is the primary purpose of a Discounted Cash Flow 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. This method involves projecting the cash flows that the investment is anticipated to generate over a certain period and then discounting those cash flows back to their present value using an appropriate discount rate.

This focus on cash flows is critical because it reflects the actual economic benefits that an investor can expect to receive from the investment. By assessing the value in terms of future cash generation, the DCF approach provides insights into whether an investment is undervalued or overvalued in the current market, guiding investment decisions.

Other options such as assessing the current market price of a stock, determining the risk level of an investment, or evaluating past financial performance address different aspects of financial analysis but do not specifically encapsulate the core intent of a DCF analysis. The DCF methodology is fundamentally about valuation based on expected future cash flows, making it a vital tool for investors looking to make informed decision-making grounded in the potential for future earnings.