when a company analyzes whether it should invest in a certain project or purchase new equipment it usually uses its weighted average cost of capital wacc as the discount rate to evaluate the dcf 
the wacc incorporates the average rate of return that shareholders in the firm are expecting for the given year for example say that your company wants to launch a project the company s wacc is 5 that means that you will use 5 as your discount rate the initial investment is 11 million and the project will last for five years with the following estimated cash flows per year using the dcf formula the calculated discounted cash flows for the project are as follows adding up all of the discounted cash flows results in a value of 13 306 727 by subtracting the initial investment of 11 million from that value we get a net present value npv of 2 306 727 the positive number of 2 306 727 indicates that the project could generate a return higher than the initial cost a positive return on the investment therefore the project may be worth making if the project had cost 14 million the npv would have been 693 272 that would indicate that the project cost would be more than the projected return thus it might not be worth making dividend discount models such as the gordon growth model ggm for valuing stocks are other analysis examples that use discounted cash flows advantages and disadvantages of dcfdiscounted cash flow analysis can provide investors and companies with an idea of whether a proposed investment is worthwhile it is an analysis that can be applied to a variety of investments and capital projects where future cash flows can be reasonably estimated its projections can be tweaked to provide different results for various what if scenarios this can help users account for different projections that might be possible the major limitation of discounted cash flow analysis is that it involves estimates not actual figures so the result of dcf is also an estimate that means that for dcf to be useful individual investors and companies must estimate a discount rate and cash flows correctly furthermore future cash flows rely on a variety of factors such as market demand the status of the economy technology competition and unforeseen threats or opportunities these can t be quantified exactly investors must understand this inherent drawback for their decision making dcf shouldn t necessarily be relied on exclusively even if solid estimates can be made companies and investors should consider other known factors as well when sizing up an investment opportunity in addition comparable company analysis and precedent transactions are two other common valuation methods that might be used 