- Theexpectedvalueof any patentsthat thefirmcanbe
expectedtogenerateinfutureperiodsfromnewpatentsthatit
might obtain as a result of its research.
The value of the first component can be estimated using
traditionalcashflowmodels.Theexpectedcashflowsfrom
existingproductscanbeestimatedfortheircommerciallives
anddiscountedbacktothepresentattheappropriatecostof
capitaltoarriveatthevalueoftheseproducts.Thevalueof
the second component can be obtained using the option
pricing model described earlier to value each patent. The
valueofthethirdcomponentwillbebasedonperceptionsof
afirm’sresearchcapabilities.Inthespecialcase,wherethe
expectedcostofresearchanddevelopmentinfutureperiods
isequaltothevalueofthepatentsthatwillbegeneratedby
thisresearch,thethirdcomponent willbecomezero.Inthe
moregeneralcase,firmssuchasCiscoandPfizerthathavea
historyofgeneratingvaluefromresearchwillderivepositive
value from this component as well.
How would the estimate of value obtained using this
approachcontrastwiththeestimateobtainedinatraditional
discountedcash flowmodel?In traditionaldiscountedcash
flowvaluation,thesecondandthethirdcomponentsofvalue
are captured in the expected growth rate and thus in the
expected cash flows. Firms are allowed to grow at much
higherratesforlongerperiods becauseofthetechnological
edgetheypossessandtheirresearchprowess.Incontrast,the
approach described in this section looks at each patent