Rethinking Governance of the Army's Arsenals and Ammunition Plants

By W. Michael Hix; Ellen M. Pint et al. | Go to book overview

Appendix E
VALUATION OF PARCELS

INTRODUCTION
The purpose of conducting a valuation of the Army's organic industrial base prior to privatization is to establish a range of value for analysis and to create the conditions for subsequent negotiation (McKinsey, 2001, p. 3). In the case of a sale of these parcels under an Army determination of “excess to ownership but not excess to need,” the target market for the sales of the assets is, by definition, current or potential producers of ordnance materiel.1Valuation methodologies are open to biases, so it is typical to use multiple methods and assumptions to create an informed picture of the range of potential value for an asset. Corporate asset sales and mergers often take place at prices that differ significantly from what valuations would predict. This variance reflects the private information held by buyers and sellers at the time of actual sale. This private information is not always revealed in valuation methodologies, and it may only be revealed in a fully competitive sale. Army ordnance parcels are real assets with potential to produce income from manufacturing and leasing operations. Like all risky assets, value is determined by three factors:
Magnitude of expected net cash flows.
Timing of expected net cash flows.
Risk associated with these cash flows.2

This appendix outlines the techniques used in this study to create a range of possible values for Army ordnance parcels, which are then used in estimates of

____________________
1
Under ETO, the new (qualified) owner must agree to material contractual obligations to continue to manage the assets to satisfy ongoing national defense needs for a reasonable period of time.
2
Risk is a function of the volatility of expected cash flows that is correlated to overall returns in the market for risky securities. This issue will be explained in detail in this appendix.

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