- 31 -
Inflation by Ibbotson Associates, Mr. Howell applied an equity
risk premium of 7.6 percent for 1980, resulting in a discount
rate of 18.96 percent.
After reviewing the expert reports and testimony, as well as
our opinion in Gianaris, we feel that it is appropriate to apply
an 11.5-percent discount rate despite the fact that a more
realistic rate is 15 percent. This is consistent with our
approach in Gianaris.
7. Analysis
On the basis of the undisputed assumptions in the PPM and
our findings above (including application of a discount rate of
11.5 percent),19 we have calculated the net present values, as of
1980, of Sav-Fuel’s up-front payments and net receipts (taking
into account further payments to Nisona and all other fees).20
19Again, we note that we have made certain assumptions most
favorable to petitioner and that using more realistic assumptions
and figures would result in a significantly lower net present
value. See, e.g., Gianaris v. Commissioner, T.C. Memo. 1992-642.
20In Gianaris v. Commissioner, supra at n.7, we explained
the determination of present value as follows:
To determine the present value of a single future
payment, the amount of that payment is divided by the
sum (1 + i)n, where i equals the appropriate interest
(discount) rate and n equals the number of periods
(amount of time) to be taken into account. PV = CF /
(1 + i)n. (CF stands for “cash flow”.)
We explained the determination of net present value as follows:
“At a given interest (discount) rate, NPV = CF0 + CF1 /(1+i)1 +
CF2 /(1+i)2 + * * * + CFn /(i +1)n.” Id. at n.8.
Page: Previous 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 NextLast modified: May 25, 2011