The value of an asset is its ability to generate revenue or to provide to its owner(s) some sort of competitive advantage that can be quantified in economic terms.  Further, it is not as important as to how the asset performed in the past in meeting these characteristics, but how it will perform in the future.

The years in which the present asset is employed witness tremendous growth.  For most of that period the industry experienced 50 percent growth rate per annum.  In the last year or so, while the growth is still substantial at 18 to 20 percent, it is beginning to taper off.  This tapering off of the industry suggests stabilization.  A stabilized revenue stream is a condition that lends itself to using a discounted cash flow approach to value. 

First we start by determining the potential revenue to be generated from the patent.  We then determine an appropriate growth rate to apply to this revenue stream, and apply that growth rate for the next seven years.  We use seven years because that is the remaining legal life of the patent.  We determine market share for each of the seven years and apply a royalty to this revenue stream.  The royalty income for the seven year period is then discounted to it net present value to arrive at a value for each market segment.  

The discount rate is determined using the build up method.  It represents a risk adjusted rate of return available to investors in the market.  The components include: a risk free rate of return represented by an investment in a long term treasury vehicle; an equity risk premium representing the premium return an investor expects for investing in an equity position; an industry risk premium representing an additional return for an investment in this industry; and finally a premium representing functional obsolescence. 

Technological obsolescence refers to the age of the technology.  An older technology is more likely to be replaced by new and innovative technology.