Garwood Irrigation Company - Page 27

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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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