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Example of Theoretical Value
As a result of the purchase of an asset, the income stream will rise by of £1,000 per annum for 25 years. By assuming a discount rate of 20 percent, calculate the maximum price to be paid for this asset avoiding taxation.
Solution
Maximum price = Present value of all future cash inflows
Maximum price = £10,000 x PVAF20%, 25
£10,000 x (1- (1.2)-25) / 0.20 = 10,000 x 4.9476
= £49,476
During practice the income streams are never uniform and contain to be estimated from existing income indicted in the current accounts.
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