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Simple English definitions for legal terms
capitalized value
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A quick definition of capitalized value:
Capitalized value is a way to figure out how much something is worth, like a house or building. It looks at how much money the thing will make over time and calculates how much it's worth right now. This helps people decide if it's a good investment. To find the capitalized value, you divide the yearly income by a number called the capitalization rate and then take away some money because of inflation and missed interest opportunities, which is called the discount rate. For example, if a townhouse makes $20,000 a year and has a capitalization rate of 8% and a discount rate of 10%, the capitalized value would be $225,000.
A more thorough explanation:
Capitalized value is the current worth of an asset, such as real estate, based on the expected income it will generate over its lifetime. This calculation helps investors decide if an asset is a good investment.
To calculate capitalized value, you divide the expected yearly income by the capitalization rate and then reduce the sum by a discount rate to reflect the present value. The discount rate takes into account the time value of money, which means that future money is worth less than current money due to inflation and missed interest opportunities.
For example, let's say a real estate company wants to invest in a townhouse that generates $20,000 a year with a capitalization rate of 8% and a discount rate of 10%. The capitalized value would be $225,000 ($20,000 ÷ 8% = $250,000*90% = $225,000).
Overall, capitalized value is a useful tool for investors to determine the current worth of an asset based on its expected income over time.