**Traditional Net Cash Flow Methods**

**Traditional Net Cash Flow Methods**

Net Cash Flow to Equity (NCFe) and Net Cash Flow to Invested Capital (NCFic) are the traditional income methods for valuation. They are both popular but have limitations.

NCFic uses weighted average cost of capital (WACC) as the discount rate and uses the capitalization formula for terminal value (aka the Gordon Growth Model), both of which have limitations as discussed above.

NCFe has the benefit of using only the equity rate of return for discounting but it also has many of the limitations discussed above. Some of them are, NCFe method requires the assumption of debt/equity ratio, it uses the capitalization formula for terminal value and it stipulates using seller's net income rather than buyer's net income.

(Also see Valuation Approach)