Question

We bought the patent in fiscal 2019 for $4 million and have been amortizing it using the straight-line method over its 20-year useful life. As a result of new competing technology on the market, we have heard of at least one key customer that has purchased a laser machine and moved its metal fabrication in house.

Our business with that customer has slowly declined over the past year, and we filled our last order from them in June 2021. Given the loss of this key customer, we adjusted our forecast of profits and now estimate the discounted value of future cash flows related to the patent to be $2.8 million. We are not sure what the fair value of the patent would be, as there is no active market.

Answer 1

The question deals with a patent's value reduction due to new technology and the process of amortizing it over its useful life. It also touches on the broader context of intellectual property and market dynamics, with references to historical cases like Gordon Gould's laser patent.

Step-by-step explanation:

The question at hand involves a scenario where a company has bought a patent and is facing a situation where the value of the patent has diminished due to new competing technology and the loss of a key customer. Patents like the one bought in fiscal 2019 for $4 million, which are being amortized using the straight-line method over a 20-year useful life, protect the intellectual property and provide an exclusivity period, ideally to allow the inventor to earn a good return. However, the value of the patent may have to be reassessed in light of the changed circumstances, an action that reflects the complex nature of intellectual property valuation in a dynamic market.

Historic examples, such as Gordon Gould's experience with the patent for the laser invention, highlight the sometimes disproportionate relation between the social benefits of an invention and the financial reward to the inventor. Competition can lead to the rapid evolution of technology, often impacting patents' value and relevance, as seen in the competitive world of pharmaceuticals, where heavy R&D costs may only yield temporary competitive advantages once a new drug is released to the market. It illustrates the risks and rewards associated with patenting inventions and the potential financial implications for businesses holding patents.