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of the experts agreed that the base price should be discounted
for the cost of capital. Most agreed that 8 percent was an
appropriate rate.4 We shall adopt the 8-percent discount rate.
When the stream of projected irrigation income, increased by the
net inflation rate of 1 percent, is discounted at an 8-percent
rate, this results in a value of $3,742,062 for the irrigation
component of petitioner’s water right.
B. Corpus Christi Component
Corpus Christi informed petitioner that it intended to
exercise its option to purchase 35,000 acre feet of petitioner’s
water right in November 1996. The amended option contract set
the price for the water at $450 per acre foot, in addition to the
$25,000 monthly payments until closing. However, some
uncertainty existed as to whether and when petitioner would
obtain regulatory approval from the TNRCC for an interbasin
transfer of 35,000 acre feet of water. As a result of this
uncertainty, it was unknown as of the valuation date when and if
the transaction would be completed.
Respondent argues that regulatory approval by the TNRCC was
foreseeable because in the end no farmers protested the
4For example, the 8-percent discount rate was derived by Mr.
Scheig as follows: In 1996-97, the yield on U.S. Treasury bonds,
a risk-free investment, was 6.73 percent. Increasing this figure
an appropriate amount to account for the greater risk inherent in
owning water rights instead of Treasury bonds, results in a cost
of capital discount of 8 percent.
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