- 12 -
highest alternative return from assets of equivalent risk which
the investor forgoes as a result of his investment.3 Where, as
here, the fair market value of an asset substantially exceeds the
cost of acquisition, it would make little sense to measure the
opportunity cost of holding the asset by the return that the
investor could otherwise earn on the cost of the investment,
since he could sell the asset at its higher fair market value and
reinvest the proceeds. Thus, the amount that Cobb’s hypothetical
investor forgoes by holding the subject property as of mid-1990,
and which the land must yield in order to induce him to continue
holding it, is the amount that the current cash value of the land
would yield if this sum were invested in financial assets of
equivalent risk.4
In other respects, however, Cobb’s methodology seems to us
unsound. First, we are not convinced that a 2-percent allowance
should be made for soil depletion. Respondent’s expert testified
that information he received from other nursery operators whom he
interviewed suggests that topsoil loss over the limited period
3 See generally Brealey & Myers, Principles of Corporate
Finance 87-88, 248-249 (2d ed. 1984).
4 The capital gains tax that would be incurred in this
alternative reinvestment strategy represents a cost that would
reduce the return from the alternative investment relative to the
return from holding the land. Ideally this should be taken into
account. However, the size of this cost would depend upon the
hypothetical investor’s effective tax rate and whether the tax
was spread out over multiple years by use of an installment sale,
matters as to which we have no information.
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011