Implied Discount rate - NABE

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The Income Method illustrated:PCT payor’s perspectiveProjected ProfitsBeforeIP DevelopmentCostsA B CProjected ProfitsUnder CostSharingAlternativeProjected ProfitsUnder LicensingAlternativeYear 1 0 -20 0Year 2 100 100 40Total 100 80 40PCTPayment(=PV of A –PV of B)Discount Rates 17% 8%Present Values $55.26 $34.29 $21.66Alternative Discount Rates 15% 12%Present Values $58.22 $31.89 $26.3310
Financial Projections and Discount Rates• Financial projections for the licensing and cost sharing alternatives are interrelated– Projections are the same except for licensing payments under licensingalternative, and cost contributions and PCT payments under cost sharingalternative– Thus, income method builds off of single probability-weighted financialprojections associated with the CSA activity• Discount rates for licensing and cost sharing alternatives are interrelated; anydifference is solely due to– (1) incremental risk associated with cost contributions undertaken in cost sharingalternative, and– (2) risk associated with different payment forms• Are management long-term forecasts (if they even exist) true long-term probabilityweightedfinancial projections accounting for the risk of failure?– Potential use of venture capital discount rates as an alternative to “haircut” onforecasts.11
Page 2 and 3: NoticeANY TAX ADVICE IN THIS COMMUN
Page 4 and 5: Background• Discount rates reflec
Page 6: Risk vs. Expected ReturnThe least l
Page 9: Income Method• Under the income m
Page 13 and 14: The 2011 temporary regulations: dif
Page 15 and 16: The “Implied Discount rate”: in
Page 17 and 18: 2011 Temporary Regulations - Exampl
Page 19 and 20: Forms of Payment and Discount Rates
Page 22: Discount rate of revenue stream - N

Implied Discount rate - NABE

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