Another component of this business valuation method is the interest rate you will use for computing the discount of the earnings forecast. The interest rate depends on the risks connected with the business being talked about.
For example, you are buying a business, and we create the earnings forecast for the next 5 years. Our forecast shows that this company can earn up to 50 million dollars each year. The total would be 250 million, right? But that is still not our final value. If we have an interest rate of 10 percent, the discounted rate per year would be down to 91%, 83%, 75%, 68%, and 62%, respectively. Computing that would result to 45.5, 41.5, 37.5, 34, 31 million respectively and has a total value of 189.5 million dollars.