Implied Discount rate - NABE

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Background• Discount rates reflect/measure the risk associated with an expected cashflow.• Cost sharing regulations, and in particular the income method, increasedthe focus of discount rates in transfer pricing.• The key question is how to identify and measure the appropriate discountto use with a given forecasted income. Important to understand:– the forecasts: do forecasts factor in the risk of failure, or reflect expected resultsif successful?– the forecast horizon: Financial results in the distant future are more uncertainthan those in the near future– the risk level of income to be discounted: Residual profits are more uncertainthan routine profits• Many concepts/formulas to measure discount rates, e.g. WACC, WARA,the IRR4
Different Discount Rates• Weighted Average Cost of Capital (WACC)– Theoretical measure of the cost of acquiring capital based on the capital assetpricing method or other techniques – Widely used in finance• Internal Rate of Return (IRR)– Measures the rate of return on a cash flow earned from of a certain level ofinvestment• Weighted Average Return on Assets (WARA)– Reconciles total return of enterprise to rates of return on specific asset classes• Observed interest rates (e.g. borrowing rates, venture capitalist rates, etc..)5
Page 2 and 3: NoticeANY TAX ADVICE IN THIS COMMUN
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 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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