Income Approach Valuation Formula

This present value figure is the basis for a sale price.

Income approach valuation formula. Create a forecast of the expected cash flows of the business for at least the next five years and then derive the present value of those cash flows. Another approach called multi stage growth model divides future into two or more stages. The income approach is a real estate valuation method that uses the income the property generates to estimate fair value. When a property s intended use is to generate income from rents or leases the income method of appraisal or valuation is most commonly used.

A initial period of say 5 years for which net cash flows and growth rate for each year can be determined and b period after the initial period for which year by year projection is unreliable. The above equation is based on the formula for present value of a perpetuity.