In the first example, the AERR starts at 27%, rising rapidly to 81% by year 4 and 202% by Year 25.
482-7(i)(6)(vi)(E), however, because the AERR is within the PRRR for each year beginning after year 3, whereas Example 2 is not within the safe harbor PRRR for any year of that 10-year period.
The reason the AERR in example 1 increases so dramatically is that the PVI is growing slowly compared with the PVTP.
If the PCT Payment is structured as a series of payments with a fixed termination date, or in the form of a declining royalty, AERR growth will fall between the result occurring with a lump sum versus annual payments in perpetuity.
These examples illustrate the need to reconsider the concept of the AERR and how it applies in practice before promulgating final regulations.