What is the primary use of a cash flow projection in DCF analysis?

The primary use of a cash flow projection in DCF (Discounted Cash Flow) analysis is to forecast future revenues and costs for valuation. This approach is central to DCF analysis because it allows analysts to estimate the cash flows that a company is expected to generate over a specified forecast period. By evaluating these projections, one can derive an intrinsic value for the company based on its anticipated future performance.

Forecasted cash flows include both the expected revenues from sales and the associated costs necessary to generate that revenue. The accuracy of these projections is critical, as they directly impact the calculated present value of the firm. The outcome of the DCF analysis hinges on these cash flow projections, which serve as the foundation for determining whether an investment is undervalued or overvalued in the market.

In contrast, while estimating future operating expenses is important for understanding a company's performance, it is merely a part of the broader cash flow projection. Visualizing company growth trends and tracking historical performance metrics are useful for analysis but do not directly address the core objective of DCF, which is to derive value based on future cash flows.