What does Discounted Cash Flow (DCF) represent in financial terms?

Discounted Cash Flow (DCF) is a financial modeling method that assesses the value of an investment based on its expected future cash flows, which are adjusted to reflect their present value. This approach recognizes that money available today is worth more than the same amount in the future due to its potential earning capacity. By discounting future cash flows back to their present value, the DCF method allows investors to evaluate how much those future cash flows are worth today, providing a clearer picture of the investment's profitability.

This principle is fundamental in finance because it forms the basis for making informed investment decisions. By comparing the present value of cash inflows against the initial investment or cost, investors can determine if an investment is sound. Thus, identifying the correct interpretation of DCF as the value of potential future cash flows adjusted to today's value is crucial for accurately applying this financial analysis technique.