Valuing an income stream
Discussion
Hopefully there may be a way for someone who knows their way around numbers to give a quick answer to this question.
"What would you expect to be paid today if you were selling a low risk income stream of £10,000 p.a. for 25 years into the future, index linked?"
I recognise the answer isn't £250k, due to time value of money, but I'm not clever enough to do the sums!
"What would you expect to be paid today if you were selling a low risk income stream of £10,000 p.a. for 25 years into the future, index linked?"
I recognise the answer isn't £250k, due to time value of money, but I'm not clever enough to do the sums!
Panamax said:
Hopefully there may be a way for someone who knows their way around numbers to give a quick answer to this question.
"What would you expect to be paid today if you were selling a low risk income stream of £10,000 p.a. for 25 years into the future, index linked?"
I recognise the answer isn't £250k, due to time value of money, but I'm not clever enough to do the sums!
At the BoE’s target 2% inflation, it would be roughly £320k. I just used a simple compound calculator, compounding annually at a rate of 2%. Then added up each of the 25 years. So, year one is £10,000, year two £10,200 etc."What would you expect to be paid today if you were selling a low risk income stream of £10,000 p.a. for 25 years into the future, index linked?"
I recognise the answer isn't £250k, due to time value of money, but I'm not clever enough to do the sums!
BorkBorkBork said:
At the BoE’s target 2% inflation, it would be roughly £320k. I just used a simple compound calculator, compounding annually at a rate of 2%. Then added up each of the 25 years. So, year one is £10,000, year two £10,200 etc.
I’ve managed a vat of NZ Sauvignon already this aft but am fairly sure you’re going the wrong way my man - £10k next year is worth <£10k today assuming growth... As above you need to agree on a discount rate and apply to future cash flows.Dg504 said:
BorkBorkBork said:
At the BoE’s target 2% inflation, it would be roughly £320k. I just used a simple compound calculator, compounding annually at a rate of 2%. Then added up each of the 25 years. So, year one is £10,000, year two £10,200 etc.
I’ve managed a vat of NZ Sauvignon already this aft but am fairly sure you’re going the wrong way my man - £10k next year is worth <£10k today assuming growth... As above you need to agree on a discount rate and apply to future cash flows.OP’s said his incoming payments are index linked (so will each be progressively more than £10k) but need to be discounted back to present value using NPV calculation (such as online here: https://www.calculatestuff.com/financial/npv-calcu... to establish what they’re worth today.
The indexation rate needs to be assumed, and discount rate will be based on what OP/his buyer think is appropriate and could well be different to the rate used to ratchet up each future payment.
Panamax said:
Hopefully there may be a way for someone who knows their way around numbers to give a quick answer to this question.
"What would you expect to be paid today if you were selling a low risk income stream of £10,000 p.a. for 25 years into the future, index linked?"
I recognise the answer isn't £250k, due to time value of money, but I'm not clever enough to do the sums!
I would not necessarily rule this out, index linked over 25 years could add huge value, for example the £10k a year by year 25 is likely to be £17k a year (at historical low inflation rates), at an avg of 5% more like £30k a year."What would you expect to be paid today if you were selling a low risk income stream of £10,000 p.a. for 25 years into the future, index linked?"
I recognise the answer isn't £250k, due to time value of money, but I'm not clever enough to do the sums!
Ultimately it’s going to come down to how low risk is ‘low risk’- (a lot can happen over 25 years), how locked in the investment (is there a mkt to re-sell on), and what index it’s linked to (RPI is 12.3% today where as CPI 9.9%)
If the income stream is like a business, then there are multiples of profit which similar businesses tend to be valued at.
If it's like an annuity there are different well established numbers.
Things like leased out freeholds have a market rate?
You might find numbers for what royalties are valued at for instance. I hear Phil Collins and Genesis just sold their rights for a wedge, I wonder what the multiple was?
If it's like an annuity there are different well established numbers.
Things like leased out freeholds have a market rate?
You might find numbers for what royalties are valued at for instance. I hear Phil Collins and Genesis just sold their rights for a wedge, I wonder what the multiple was?
Wilmslowboy said:
Panamax said:
Hopefully there may be a way for someone who knows their way around numbers to give a quick answer to this question.
"What would you expect to be paid today if you were selling a low risk income stream of £10,000 p.a. for 25 years into the future, index linked?"
I recognise the answer isn't £250k, due to time value of money, but I'm not clever enough to do the sums!
I would not necessarily rule this out, index linked over 25 years could add huge value, for example the £10k a year by year 25 is likely to be £17k a year (at historical low inflation rates), at an avg of 5% more like £30k a year."What would you expect to be paid today if you were selling a low risk income stream of £10,000 p.a. for 25 years into the future, index linked?"
I recognise the answer isn't £250k, due to time value of money, but I'm not clever enough to do the sums!
Ultimately it’s going to come down to how low risk is ‘low risk’- (a lot can happen over 25 years), how locked in the investment (is there a mkt to re-sell on), and what index it’s linked to (RPI is 12.3% today where as CPI 9.9%)
Agreed. It is simple math to calculate the income stream and then you have to discount that stream back to today's value. however it very much depends on what 'index' the 10k is linked to. Secondly, exactly what the streams based on. You say 'low risk' but that may not be what another investor considers low. Therefore the discount rate or rate of return sought will vary. If it's rent on an installation backed by a blue chip corporate with no outs I would think a discount rate of 6-7% minimum. Some big variables at play, namely the index(growth factor). For example if someone demanded a 6% return and the 10k is linked to +2%, the PV is worth 125k.
Panamax said:
Hopefully there may be a way for someone who knows their way around numbers to give a quick answer to this question.
"What would you expect to be paid today if you were selling a low risk income stream of £10,000 p.a. for 25 years into the future, index linked?"
I recognise the answer isn't £250k, due to time value of money, but I'm not clever enough to do the sums!
I own a portfolio of indexed linked ground rents and have to consider their value when approached for lease extensions/ enfranchisement so I may have some insight on this"What would you expect to be paid today if you were selling a low risk income stream of £10,000 p.a. for 25 years into the future, index linked?"
I recognise the answer isn't £250k, due to time value of money, but I'm not clever enough to do the sums!
You need to calculate the capitalization rate firstly
Take the risk-free rate which currently is MINUS 0.25% ( the Ogden Rate) and then add the risk premium, without knowing the background, this is difficult to know what to add. Then, based on the frequency of the review, you need to add to that capitalization rate Finally, you need to deduct the costs of managing that income stream and collecting in that sum.
In the case of an indexed linked ground rent reviewed every year, I believe the rate to be around 3%
So if 3% applied to your stream of income, it would be
NPV = C x {(1 - (1 + R)-T) / R}
£10000 X ( 1 - 1.03 ^ -25) / 0.03
£10000 X ( 1 - .47761 ) / 0.03
£10,000 X 0.5224 / 0.03 = £174133*
I made a schoolboy error in my original post as was pointed out and I have corrected it
Edited by Numpty with honours on Thursday 6th October 23:38
Edited by Numpty with honours on Thursday 6th October 23:39
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