100 ! 100 ! 100 ! 100 |- | Cost of Production ! 40 ! 40 ! 40 ! 40 |- | Royalty Due,R ! 4 ! 4 ! 4 ! 0 |- | Total Cost ! 44 ! 44 ! 44 ! 40 |- | Operating Profit OPR ! 56 ! 56 ! 56 ! 60 OP |} It is evident that in the 6th year, the Operating Profit of the enterprise increases by $4000. The higher value of the Operating Profit in the 6th year would not be apparent if assessment was limited to the first 5 years of royalty commitment. Algebraically, LSEP = R/(OPR+R) - C where: LSEP is the licensor's share of licensee's profit (see Expression A above) R is the absolute amount of royalty paid OPR is the profit-before-tax during the royalty-applicable period Expression C can be rewritten as: LSEP = 1/ (1 + OPR/R) - D or as LSEP = 1 / (1+TTF) - E where TTF is defined as the Technology Turnover Factor. It is a measure of the profit or return that the enterprise obtains for a unit of royalty payment - the profit accelerator. A high TTF implies a lower share of enterprise profit flows to the licensor (and conversely, a higher share to the licensor when the TTF is small). The evaluation of Expression E and that of TTF provide estimates of commitments to the technology-offering party in accepting a license at a particular royalty rate (and a base for negotiations). Expression C also defines the term 'profit' for this analysis; it is the profit before tax during the royalty-bearing period and not that of the post-royalty period. Thus, taxation rates do not come into play and it is possible to evaluate the impact of royalties independent of territory. Of course, in normal business practice, royalty rates take on different forms, while sales, costs and profits vary from year to year. Unless they can be consolidated to single numbers, the practical use of Expressions (D) and (E) would not be feasible. This can be done by converting all cash flows to their 'Present Value'. The 'Present Value' method of capitalizing flows The concept of Present Value is routinely used in financial analysis of projects to make a selection where there are alternative financing modalities or to assess incomes/expenditures in the context of different risk projections. Its objective is to capitalize