From the course: Finance Foundations: Business Valuation
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Income approach and the time value of money
From the course: Finance Foundations: Business Valuation
Income approach and the time value of money
- The three primary asset valuation techniques are the market approach, the cost approach and the income approach. The income approach is the most difficult and involves the most uncertainty. The income approach is the general heading given to valuation techniques based directly, or indirectly, on discounted cash flow analysis, often called DCF. To use an income approach in estimating the fair value of a piece of commercial real estate, you would estimate the amount of net cash flows to be generated by the property plus the amount for which the real estate could be sold at some terminal period. All of these cash flows would then be discounted to the present using an appropriate interest rate. Yikes, that sounds difficult. So let's take this step-by-step and we'll start with the time value of money. So let me ask you some questions. Do you prefer to receive a hundred dollars now or a year from now? Do you prefer to pay a…
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