Implied Discount rate - NABE

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Discount rates illustrationDiscount Rate forresidual profitA B CRoutine Profits Total Profits DifferenceYear 1 0 -20Year 2 40 100Total 40 80DResidual Profits= (B – A)-206040Discount Rates 12% 15%Present Values $31.89 $58.22 $26.3317.67%$26.33Benchmarked by WACCsof comparablesAppropriate discount rate fortotal profit, e.g., WACCDerived rate that equates the presentvalue in D to the amount in CIncome method calculation in final regulationsIncome method calculation inproposed regulations16
2011 Temporary Regulations - Example 8• Two cost sharing participants; one has a PCT contribution which is valued usingIncome Method• The discount rates for the cost sharing alternative is estimated at 20 percent andthat for the licensing alternative is estimated at 10 percent resulting in a $146 millionPCT• The Commissioner computes an “implied discount rate” by equating the net presentvalue of the “differential income stream” to the PCT value of $146 million, whichresulted in a “implied discount rate” of 34.4 percent• By analyzing comparable uncontrolled companies, the Commissioner concluded thata reasonable “implied discount rate” based on market evidence is about 16 percent• Thus the taxpayer’s analysis was deemed unreasonable and an adjustment wasissued17
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 and 10: Income Method• Under the income m
Page 11 and 12: Financial Projections and Discount
Page 13 and 14: The 2011 temporary regulations: dif
Page 15: The “Implied Discount rate”: in
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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