The Income Approach
The income approach is presented first because, in theory, it is the dominant approach in business valuation (although Revenue Ruling 59-60 and many investment bankers also put heavy emphasis on the market approach). The discounted cash flow (DCF) method is the most conceptually correct method because it captures the driving principle of valuation: value is the present worth of future benefits. Capitalizing is merely a shortcut method that hopes to produce a similar result, as it considers only one year of income, whereas the DCF method projects income into the future. A basic corporate finance text articulates this critical point:
Value today always equals future cash flow discounted at the opportunity cost of ...