Which principle does discounted cash flow analysis primarily rely on?

Discounted cash flow analysis primarily relies on the principle of the time value of money. This principle asserts that a sum of money has greater value now than it will in the future due to its potential earning capacity. In other words, money available today can be invested to generate returns, making it worth more than the same amount in the future.

In the context of discounted cash flow analysis, this principle is applied to estimate the present value of future cash flows expected from an investment. The future cash flows are "discounted" back to their present value using a specific discount rate, which reflects the risk and opportunity cost of the investment. This approach allows appraisers and investors to assess the overall worth of an asset by considering both the timing and magnitude of future cash flows.

While the other concepts listed, such as market capitalization, residual value, and net present value, are related to valuation and investment analysis, they do not encapsulate the foundational principle driving discounted cash flow analysis as fully as the time value of money does.