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method to determine the present value of the future cash flows
generated by the License Agreement. Mr. Reilly applied a
discount rate of 49.6 percent to account for the high degree of
risk associated with the startup venture and the risk in general
for small, thinly capitalized equity investments. Mr. Reilly
applied this discount to two income streams--the actual payments
made by HSN to Pioneer from July 1985 through 1993 and the
projected payments based on estimates of HSN’s penetration level
with nationwide cable operators, average purchases by viewers,
and HSN’s gross profit margin. Assigning similar weight to each
approach, Mr. Reilly concluded that the value of the License
Agreement as of June 21, 1985, was $2,600,000, within the range
of value for the Local Software.
Douglas F. Benn and Udo W. Pooch, respondent’s experts,
utilized the VALPRO model, developed by Mr. Benn, to estimate
reproduction and replacement costs for the Local Software. The
VALPRO model attempts to incorporate and synthesize a number of
widely accepted methods. It is based on the concept of the
software development process as a long life cycle, a concept
developed by Lawrence H. Putnam, Sr. The VALPRO model, however,
has had no commercial usage or publication. Pursuant to this
method, respondent’s experts concluded that the cost to replace
the Local Software was $58,394, and the cost to reproduce the
software (after applying an adjustment for obsolescence) was
$148,960. Next, Messrs. Benn and Pooch determined from a
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