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Without comparable properties, we turn to the DCF method.4
C. Discounted Cashflow
The DCF method calculates a cashflow from a property and
then discounts it to the present. In the case of the Hamblen
Road property, using the DCF method means creating a hypothetical
mining plan--estimating the volume of recoverable sand and
gravel, figuring out how long it would take an operator to mine
it, finding a reasonable royalty rate and residual value, and
then applying an appropriate discount rate to the resulting
cashflow.
1. Volume
The parties disagree about almost all the component factors,
even the gross volume of valuable sand and gravel beneath the
property. Geotest Engineering concluded that the property holds
3,899,696 tons of sand and gravel, a number it reached using its
own core samples and the “average end area” method. Ebanks and
Moritz also started with Geotest’s core samples, but Ebanks used
them to create his isopach map. He then used this map together
with a planimeter5 to get a gross volume, while Moritz used the
Geotest core samples to calculate an average of the net aggregate
4 See Cloverport, 6 Cl. Ct. at 194 (“Because the plaintiff’s
property is an income producing property capable of producing a
stream of income derived from what both parties concede is the
property’s highest and best use, the income capitalization
approach is a preferable valuation method”).
5 A planimeter is a mechanical device used to calculate the
volumes of irregularly shaped three-dimensional shapes.
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Last modified: November 10, 2007