Cost approach method

Technology valuation

Cost approach method

The cost aproach method calculate technology value based on costs associated with developing the technology. It seeks to determine the value of an IP asset at a particular point of time by aggregating the direct expenditures and opportunity costs involved in its development and considering obsolescence of a technology. There are two variations of this method: the reproduction cost method and the replacement cost method.

Reproduction cost method

Replacement cost method

Replacement cost contemplates the cost to recreate the functionality or utility of the subject IP, but in a form or appearance that may be quite different from the subject IP. It is the total cost, at current prices, to create an asset having equal functionality or equal utility to the subject IP. However, the replacement IP may have greater functionality and/or utility than the subject IP.

Reproduction cost contemplates the construction of an exact replica of the subject technology.

• It is the total cost, at current prices, to develop an exact duplicate o replica of the subject IP.
• This duplicate asset would be created using the same or similar materials, standards, design, layout,and quality used to create the original IP asset.
• The reproduction cost method does not account for changes in technology, higher utility from other materials, and other factors.

The cost method could be summarized as follows

First, calculate the replacement cost through the formula: Reproduction Cost - Curable functional and technological obsolescence = Replacement cost Next, use the replacement cost to estimate the IP's value. Replacement Cost - Economic obsolescence - Incurable functional and technological obsolescence = Value

How can companies create value from their innovation?

Companies can create value from their innovations by selling their products or services produced through that innovation, companies can also have an additional source of income by selling the right of use it to other companies, in other words they can licensing the use of that innovation. Licensing allows owner of the innovation to expand the market of their technology to different fields and territories while maintaining ownership of the technology. To license a new technology and to protect it, the innovation should have a patent or know-how.

References:

1. World Intellectual Property Organization (WIPO) & International Trade Centre (ITC), (2010). Exchanging Value – Negotiating Technology Licenses, A Training Manual (pp 32-41).
2. IP Valuation, accessed April 9 2024, https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_11_learning_points.pdf

Student name: Diego Fernando Rodríguez Farías Group number: 212032_146Date: April 8th 2024 Selected Topic: Cost approach method