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evidence in the record reflects that this was the partnership’s
only asset and source of income. Thus, the proper net present
value analysis in this case should be for a term of 25 years.
Although Mr. Horvey’s calculations are helpful through the year
2005, his ultimate conclusion based on a 50-year cashflow
analysis is misplaced.
Respondent’s argument that the appropriate discount rate to
apply is 18.96 percent is based on the report and testimony of
Ken D. Howell (Mr. Howell), a petroleum engineer. Mr. Howell is
currently responsible for conducting independent examinations of
tax returns filed by large organizations. His duties require
knowledge of engineering valuation principles, tax law, and
industry practice, and for the last 12 years he has prepared
written technical and valuation reports to taxpayers.
Mr. Howell used the buildup method18 to arrive at a discount
rate he felt was appropriate. Mr. Howell stated that the average
rate of return on a 20-year U.S. Government bond in 1980 was
11.36 percent (which would be the risk-free rate of return for
1980). Mr. Howell felt that it was appropriate to add an equity
risk premium to this figure to arrive at the discount rate.
Using historical data published in Stocks, Bonds, Bills, and
18According to Mr. Howell, the buildup method is an additive
model in which the return on an asset is estimated as the sum of
a risk-free rate and appropriate risk premiums, such as equity
risk and firm size risk.
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