Present Value = Future value / (1+discount rate) iįuture value represents the sum of expected cash flows in a future period ĭiscount rate reflects different types of risks that affect the future income. The DFC method evaluates the present value of future cash flows. Among them the most widely used is the discounted cash flow method.ĭiscounted cash flow method (DCF) is based on the concept of the time value of money which says that a certain amount of money today has different buying power than the same amount of money in the future. Each of them is taking into account different aspects influencing future profits from the new technology. That’s why we can find different facets of the income approach. The key point of such estimation is the risk associated with each factor potentially affecting both market (future demand, regulation, exchange rate, etc.) and technology which can become obsolete.
The main drawback of the estimation of future revenues is the uncertainty of any long-term prediction. The value of technology is considered as the difference between the cash inflows and outflows over a certain period of time.
This method determines the profit-creating potential of the new technology. The income approach is based on the expectation of future cash flows resulting from the technology implementation. Even if the market of similar technologies exists, to apply the market approach we need an open access to the information about the transactions on this market.īesides, the market approach, as well as the cost approach doesn’t reflect the future income generated by a new technology. For example, in case of a breakthrough technology, it is difficult to find the comparable equivalents. However, in practice, the active market of new technologies doesn’t always exist. This method is a reliable way to get the market price for which at the moment technology can be acquired. The market approach is based on the comparison of value of similar technologies that are already available on the market. Moreover, this method can be useful in the establishing of a joint venture, to evaluate the investments made by each party. It can be helpful in understanding the other party’s position. However, the cost approach can be a basis for the initial stages of negotiations. Another drawback of the coast approach is that it doesn’t reflect the future income of the new technology and its market position. So, from the buyer’s point of view these costs will be not justified. For example, some of the supplier’s costs could be a result of his (her) inefficient management. It is obvious that the coast approach of valuation is highly subjective. But it is almost impossible to estimate costs for the creation of intellectual property which is purely intangible. This method can be potentially applied to the transfer of equipment and other tangible assets. The buyer estimates the future costs for replication of the similar technology in-house, hedging the organizational and country risks in the specific case. The cost approach is based on the assessment of the costs of developing a new technology.įor the developer, the value of the new technology is equal to the total amount of costs associated with its development, including indirect costs for infrastructure, utility, manpower, taxes etc. There are also several more sophisticated methods implying more complex mathematical calculation. These methods are not complex investment models, and are based rather on the logical analysis of the existing information on a new technology. There are three basic methods of technology valuation based on cost, market and income approaches. This will determine a framework for a constructive discussion which will allow both parties to have the same nature of arguments while negotiating the price of technology. So, one of the key points of technology transfer is the choice of the valuation method that would be accepted by each participant of the negotiations. In this case, at the present moment we need to evaluate something that will appear only in the future.ĭuring the negotiations both parties are concerned to prove that the price they propose is the most realistic and objective one. The task becomes more complicated if the technology is still in process of developing.
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How to determine the price that will objectively reflect the value of technology? This question arises both from developer’s and buyer’s side, especially in case of intellectual property valuation. Technology valuation is an essential part of technology transfer.
By Denis on Augin Business Development, Technology Transfer