Definition

Discounted Net Income 20-year (DNI-20) Value is a valuation method that estimates the present value of a company's net income over a 20-year period, taking into account the time value of money by applying a discount rate.

How to use the valuation method

To use the DNI-20 valuation method, forecast the company's net income for each of the next 20 years. Then, choose an appropriate discount rate, often based on the company's cost of capital or required rate of return. Calculate the present value of each year's net income using the formula, and sum these values. Next add the cash per share value and minus the debt per share value to obtain the DNI-20.

Which industries it work best in

The DNI-20 method works best in industries with stable and predictable income streams, such as utilities, consumer staples, and mature manufacturing sectors. These industries typically have less volatile earnings, making long-term income projections more reliable.

Which industries it does not apply to and why

The DNI-20 method is less applicable to industries with high volatility and uncertainty in earnings, such as technology startups, biotech firms, and cyclical industries like oil and gas. These sectors often experience rapid changes, making long-term income forecasts challenging and less reliable.

Summary

The Discounted Net Income 20-year (DNI-20) Value is a valuation approach that calculates the present value of a company's projected net income over a 20-year period. It is particularly useful for industries with stable earnings but less suitable for sectors with high volatility and uncertainty.