Modern Methods For the Valuation of Intellectual Property

01 November 1998
By Drs. Richard Rapp and Lauren Stiroh

This paper provides an illustration of how familiar methods of asset valuation may be used to value intellectual property. The methods described are routinely used in licensing, transfer pricing and ordinary valuation, as well as in the course of patent infringement litigation. Newer asset valuation methods can also be used to determine the value of intellectual property while it is still in the development stage. This sort of valuation can help a firm determine whether it is worthwhile to continue to invest in an ongoing project.

Part II of this paper describes some recent empirical findings on patent value. Part III then describes widely used methods of valuing a process patent that are often misused. Part IV introduces discounted cash flow analysis to determine the value of intellectual property embedded in a production process. Part V considers the issue of the bargaining range in licensing negotiations. Finally, part VI considers the question of how a research firm should evaluate its investments in R&D. By treating an investment in R&D like an investment in a stock option, we are able to adjust the value of continued investment in R&D for the risks associated with R&D.