In valuation, Years’ Purchase (YP) is the factor used to convert the annual income or net rental income of a property into its capital value. It is directly related to the number of years for which the income is expected to continue and the rate of return (yield) expected by the investor.

1. Relationship between Years’ Purchase and number of years

Years’ Purchase does not always equal the actual number of years. It depends on whether the income is expected for a limited period or indefinitely, and whether future income is discounted to its present value.

A. When income continues for a limited number of years

If the property generates income for a fixed number of years and there is no discounting or interest adjustment, the YP would simply equal the number of years.

For example, if annual net income is ₹1,00,000 for 5 years:

However, in practical valuation, money received in the future is worth less than money received today. Therefore, the discounted Years’ Purchase is generally used.

B. Years’ Purchase for a fixed period with discounting

The formula for the Years’ Purchase of a term of (n) years at a yield of (i) per year is:

Where:

• n= number of years

• i= annual yield or discount rate, expressed as a decimal

• YP = Years’ Purchase factor

For example, at an 8% yield:

Illustrative factors calculated using annual discounting at 8%.

Notice that as the number of years increases, YP also increases, but it increases at a decreasing rate. This happens because income received in the distant future has a lower present value.

2. Relationship between YP and the rate of yield

For the same number of years:

• A higher yield produces a lower YP.

• A lower yield produces a higher YP.

• A longer income period generally produces a higher YP, assuming the yield remains unchanged.

For example, for a 10-year income stream:

3. Years’ Purchase in perpetuity

If the income is expected to continue indefinitely, the formula becomes:

At an 8% yield:

If the annual net income is ₹1,00,000:

Here, there is no fixed number of years; the income is assumed to continue indefinitely.

4. Understand the relationship visually

5. Key takeaway for property valuers

Years’ Purchase is not simply the number of years. It is a multiplier representing the present value of the expected income stream.

• Fixed term: YP depends on the term and yield.

• Perpetuity: YP is the reciprocal of the yield.

• Capital value: Annual net income × YP.

In valuation practice, it is important to select the correct YP formula for the type of interest being valued, such as freehold, leasehold, or a property with a temporary income stream.