What is typically assumed about cash flows in a DCF analysis?

In a discounted cash flow (DCF) analysis, the assumption is that cash flows will change over time based on various projections. This reflects the reality of most businesses, where revenues, operating costs, and other financial metrics do not remain static. Instead, analysts project future cash flows by considering factors such as market trends, economic conditions, competitive landscape, and company-specific strategies.

These projections may anticipate growth, which sees an increase in cash flows, or potential downturns that could lead to decreases in cash flows. The dynamic nature of these assumptions is crucial to effectively estimating the present value of future cash flows, which is the core purpose of DCF analysis.

This approach allows for a more nuanced and realistic view of a company's value, as it takes into account the potential for variability in financial performance rather than relying on a fixed amount, which would not accurately reflect real-world operations. Thus, projecting cash flow changes is essential for deriving an accurate valuation in DCF.