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CMA Final · Strategic Performance Management and Business Valuation · Valuation of Assets and Liabilities

Meridian Textiles Ltd holds a patented weaving process expected to generate incremental after-tax cash flows of ₹40 lakh in each of the next 4 years, after which the patent expires and has no residual value. The appropriate discount rate is 10%. Annuity factor for 4 years at 10% is 3.1699. What is the value of the patent under the income approach (nearest ₹ lakh)?

The patent is worth about ₹127 lakh. Under the income approach, the four equal annual after-tax cash flows of ₹40 lakh are discounted at 10% using the annuity factor of 3.1699, giving 126.8 lakh. Simply adding the cash flows to ₹160 lakh would ignore time value.

  1. A₹127 lakhCorrect
  2. B₹160 lakh
  3. C₹110 lakh
  4. D₹100 lakh

Explanation

Value = 40 × 3.1699 = 126.80, i.e. about ₹127 lakh. The undiscounted total of ₹160 lakh ignores time value of money. Using a 3-year factor or other shortcuts understates the value, since the full 4-year life is available.

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