Implied Discount rate - NABE

Income Method• Under the income method, the PCT payments are calculated as follows:(PV of cash flows from the cost sharing alternative) – (PV of cash flows from thelicensing alternative)• The final regulations emphasize further that the financial projections used in applyingthe income method are “necessarily the same” in comparing the cost sharingalternative to the licensing alternative• Consequently, differences between the discount rates must reflect only thedifferences between the obligations undertaken under the two alternatives• The effective result is:– PCT Payor is left with a return for its “routine” functions and risk plus an appropriateexpected rate of return for its risky investment in intangible investment.– PCT Payee captures all future “economic profit” over and above the return for routinefunctions/risks• The PCT payments are primarily a function of:– Discount rate spread between the licensing and cost sharing alternatives– Projections regarding long-horizon expected profitability9