What is the primary disadvantage of using a Discounted Cash Flow (DCF) analysis?

The primary disadvantage of using a Discounted Cash Flow (DCF) analysis lies in its high sensitivity to assumptions. DCF involves projecting the future cash flows of an investment and discounting them back to their present value. This process relies on several key assumptions, including future growth rates, discount rates, and the duration of cash flows. A small change in any of these assumptions can lead to significant variations in the valuation outcome. Therefore, if the assumptions are overly optimistic or pessimistic, the analysis can produce misleading results, making it crucial to approach DCF with caution and to continuously revise assumptions as new information becomes available.

The other options, while having some relevance, do not capture the core vulnerability of DCF analysis as well as this one does. Extensive market data is not a primary restriction for DCF, as it can be based on projections and estimates rather than solely on external market data. Similarly, the reliance on past performance data can be a factor in various valuation methods, but DCF is primarily forward-looking and designed to incorporate future expectations. Lastly, the consideration of future growth is integral to DCF; it is specifically designed to evaluate cash flows that are expected to occur in the future, rather than only relying on historical performance.