Derivation of Cash Flows from Different Models

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This will quantify the shortest of such as the following lives: physical, functional, technological, economic and legal, and then must include consideration of expenses together with an estimate of residual value or terminal value, if any. This method recognises market conditions, likely performance and potential, and the time value of money. It is illustrative, demonstrating the cash flow potential of the property and is highly regarded and widely accepted in the financial community. The discount rate to be applied to the cash flows can be derived from a number of different models, including common sense, build-up method, dividend growth and the Capital Asset Pricing Model (CAPM) using a weighted average cost of capital (WACC). 12 Increasing Importance of IP In today’s knowledge economy, IP is undoubtedly becoming more important in securing a country’s prosperity and has never been more challenged by the changing context of innovation: it is estimated that 70% of a typical company’s value lies in its intangible assets, up from around 40% in the early 1980’s and the number of patent applications have more than doubled at the European Patent Office (EPO) in the last ten years.

While the number of registered IP rights has increased, the valuation of IP remains largely subjective like in the case of Nevium and a specialist field. Traditional accounting methods only allow the inclusion of IP on the balance sheet when it has been bought rather than developed in-house. Proposals to update International Accounting Standards to reflect the value of intangible assets are currently under discussion. Despite IP’s increasingly central importance to the UK economy, consumer knowledge of IP is low. A MORI poll on IP and UK public attitudes showed that awareness of the phrase ‘Intellectual Property’ is generally low, with many respondents having to guess what ‘Intellectual Property’ meant. Apparently participants were more knowledgeable about IP that is observable, such as trade marks, than more abstract forms of IP, such as patents. 13 When briefed as to what IP rights were, participants in the MORI survey felt that they were often used exploitatively by companies and in an anticompetitive manner. IP crimes such as piracy and buying counterfeit goods were seen as ‘victimless’ with no guilt associated to buying fake goods at low prices. Fear of buying potentially harmful goods, such as fake pharmaceuticals, was stronger: they saw the enforcement of standards and the protection of consumer rights as the most important aspects of IP policy. Intellectual Property in the UK The UK Intellectual Property framework has developed in recent years against a background of profound change including rapid globalisation and technological change (Gowers, 2006). Both have presented significant economic opportunities and significant challenges to the IP system. As a result of these changes IP rights have become increasingly important in promoting innovation, but many of the environmental challenges facing the IP system have yet to be addressed. Globalisation The increase in global trade has created larger markets for UK-based firms. For example, income and population growth have increased the size of the world market by a factor of four since 1950. These wider 14 markets also bring the challenge of increased competition with innovative international firms driving productivity growth in many sectors.

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