This financial valuation method involves identifying future cash flows directly attributable to the intellectual property asset: royalties received, cost savings resulting from exclusivity, or a share of the revenue generated by the asset.
These cash flows are then projected over the estimated useful life (the legal term of the patent, the contractual term of the license, or the foreseeable economic life). Each annual cash flow is discounted using a discount rate that reflects the cost of capital and the risk specific to the asset.
The sum of these discounted cash flows constitutes the value of the asset.
The method requires precise assumptions regarding revenue growth, the obsolescence rate, and the discount rate used—sensitive parameters that can significantly affect the result.