Which analysis method considers future cash flows to derive present value?

Discounted Cash Flow Analysis (DCF) is a valuation method that explicitly accounts for future cash flows and their present value. This method involves forecasting the expected cash flows that a business will generate over a specific time period and then discounting them back to their present value using a discount rate, typically the company's weighted average cost of capital (WACC). The core principle of the DCF method is the time value of money, which posits that a dollar earned in the future is worth less than a dollar earned today due to its potential earning capacity.

This method is particularly valuable in investment banking and corporate finance, as it provides insights into the intrinsic value of a business by reflecting the operational performance and future growth prospects. It also helps in assessing how much investors should be willing to pay for an asset based on its expected future cash generation.

Other methods mentioned, such as Market Capitalization, Precedent Transactions, and Comparable Companies Analysis, do not rely on forecasting future cash flows to determine present value. Instead, they use market metrics, recent transactions, or peer company comparisons to derive valuations, which can be less reflective of a company's future earning potential.