The income value is calculated as the present value of the expected average achievable future net profit. This net profit is determined by means of historic profits achieved, after a correction for incidental profits and losses, normal depreciations, and additions to and withdrawals from provisions. The thus determined profit is discounted at the cost of equity; the required rate of return for an investment with a certain risk profile.
In case of the ‘improved income method, the thus determined value is further corrected for the shortage/excess of equity. In case of the ‘regular income method’, this correction is not carried out.
The improved income method is easier to apply than the DCF method. An important disadvantage is however that we are looking at the past, because of which the influence of for example investments, policy changes, market changes, or the specific position of parties interested are neglected.
