Discounted cash flow analysis helps to determine the value of investments based on future cash flows.
The present value of expected future cash flows is calculated using a predicted discount rate.
If the DCF is higher than the current value of the investment, the opportunity may result in a positive return and may prove worthwhile.
Companies usually use the weighted average cost of capital (WACC) for the discount rate because it takes into account the rate of return expected by shareholders.
The disadvantage of DCF is its dependence on estimates of future cash flows, which may be inaccurate.