Capitalized Value Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Capitalized Value, written in plain English, along with examples of how it is used.

What is Capitalized Value?

(n) Capitalized Vale is the amount arrived based on the net present value of future anticipated or projected earnings of a business, investments, expenditure etc .

History and Meaning of Capitalized Value

Capitalized Value is a term used in finance and accounting to determine the value of a business or an investment based on its projected earnings in the future. It is an estimation of how much an asset is worth at the present time based on its future earnings potential. To calculate capitalized value, the projected earnings are divided by an appropriate discount rate, which is used to determine the present value of future cash flows.

Examples of Capitalized Value

  1. A company has projected earnings of $1 million per year for the next five years, and a discount rate of 10% is used. The capitalized value of the company would be determined by dividing $1 million by 0.10, resulting in a capitalized value of $10 million.

  2. A property owner has projected rental income of $50,000 per year for the next ten years, and a discount rate of 8% is used. The capitalized value of the property would be determined by dividing $50,000 by 0.08, resulting in a capitalized value of $625,000.

  3. An investor is considering purchasing a business that has projected earnings of $200,000 per year for the next three years, and a discount rate of 12% is used. The capitalized value of the business would be determined by dividing $200,000 by 0.12, resulting in a capitalized value of $1,666,667.

Legal Terms Similar to Capitalized Value

  1. Net Present Value (NPV) - a financial measure used to determine the value of an investment based on its expected future cash flows.

  2. Internal Rate of Return (IRR) - a financial measure used to determine the profitability of an investment by calculating the discount rate that makes the present value of future cash flows equal to the initial investment.

  3. Discounted Cash Flow (DCF) - a method used to determine the value of an investment based on its future cash flows, by discounting the projected cash flows to their present value.