The tax amortization benefit is a factor that needs to be
considered in the discounted cash flow (DCF) method for calculating the fair
value of an intangible asset. In the DCF method, the cash flows generated by
the intangible asset are projected over its useful life, and these cash flows
are then discounted back to their present value using a discount rate that
reflects the risk associated with the asset.
The tax amortization benefit arises from the tax deductions
that a company can claim for the amortization of the intangible asset over its
useful life. This benefit reduces the company's taxable income and therefore
lowers its tax liability. The treatment of the tax amortization benefit in the
DCF method depends on the assumptions that are made about the tax rate, the
useful life of the intangible asset, and the timing and amount of the tax
deductions.
One approach is to include the tax amortization benefit in
the cash flows that are projected for the intangible asset, using the expected
tax rate and the expected timing and amount of the tax deductions. This
approach effectively adds the present value of the tax amortization benefit to
the fair value of the intangible asset.
Alternatively, the tax amortization benefit can be reflected
in the discount rate that is used in the DCF method. This approach assumes that
the benefit is already incorporated into the cash flows, and adjusts the
discount rate to reflect the tax savings that result from the amortization
deductions. The adjustment to the discount rate depends on the expected tax
rate, the useful life of the intangible asset, and the expected timing and
amount of the tax deductions.
Overall, the treatment of the tax amortization benefit in
the DCF method requires careful consideration of the assumptions that are made
about the tax implications of the intangible asset, and the approach that is
used should be appropriate for the specific circumstances of the asset and the
company.
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