What is Discounted Cash Flow (DCF) analysis primarily used for?

Discounted Cash Flow (DCF) analysis is primarily utilized for valuing an investment based on its expected future cash flows. This method involves estimating the future cash flows that an investment will generate, and then discounting those cash flows back to their present value using an appropriate discount rate. The core principle behind DCF is that money received in the future is worth less than money received today due to the time value of money.

This valuation technique is particularly useful in assessing the intrinsic value of an investment, allowing investors to determine whether it is undervalued or overvalued compared to its current market price. By projecting expected cash flows and applying the discounting process, DCF provides a systematic approach to investment appraisal, emphasizing the importance of cash generation potential.

While other options may relate to aspects of financial analysis, they do not align with the primary function of DCF. Assessing market competition is a strategic analysis, calculating total shareholder return focuses on performance metrics rather than investment valuation, and managing operational costs pertains to budgeting and efficiency rather than direct valuation analysis of future cash flows.