Learning objective
After studying this lesson, learners will be able to identify and apply income-based methods for valuing intangible assets.
Lesson content
The income approach is one of the three main approaches to valuing intangible assets. It is based on an asset’s ability to generate future cash flows.
Under this approach, the asset’s value equals the present value of the future cash flows it is expected to generate throughout its useful life.
Main methods within the income approach:
1. Discounted Cash Flow (DCF)
Future cash flows are converted to present value using an appropriate discount rate, which usually reflects the asset’s risk.
2. Multi-Period Excess Earnings Method (MEEM)
This method values a business’s primary assets, such as customer relationships, by calculating excess earnings after deducting returns on other assets.
3. Relief from Royalty
This method assumes that, without owning the asset, the company would have to pay royalties to use it. The asset’s value equals the present value of those avoided payments.
Control question
Which statement about Relief from Royalty is correct?