What is the advantage of using a discounted cash flow method over other methods?

The discounted cash flow (DCF) method offers a significant advantage because it accounts for the time value of money. The fundamental principle behind this concept is that the value of money changes over time due to factors such as inflation, opportunity cost, and the potential for investment growth.

By using DCF, you take into consideration not only the amount of cash flows expected in the future but also when those cash flows are expected to occur. This method discounts those future cash flows to present value terms, allowing for a more accurate assessment of an investment's value over time. Thus, DCF enables investors and analysts to make informed decisions based on the present value of expected future returns, reflecting a more realistic picture of potential investment profitability.

In contrast, other methods might not sufficiently capture this time-related aspect, leading to unreasonable valuations. For instance, simpler methods may overlook the need to adjust for when cash flows occur, while historical value assessments do not consider current and future monetary conditions, thereby limiting the analysis's relevance in decision-making.