The way I figure you want as much water volume to sparge with as possible with the batch sparge setup, so using some of that water for a mash out should result in less than optimal efficiency. For this reason I'd planned on taking a portion of the wort, boiling it, and adding it back to the mash for mashout. I even made a calculator to help me figure out how much wort to remove (as well as doing other calcs). I can send you the excel table but with one important caveat:
I did this when I was planning on moving to batch sparging (I fly sparge) I still am but I'm in the process of converting to eHerms so I've never used the calculator and probably never will and thus cannot verify its accuracy. That said, it's based on the formulas Palmer provides in How to Brew. In short, caveat emptor. Oh, and I structured it with the assumption that I'd do two equal sized batch sparges (split sparge) with each batch equal to the mash volume (supposedly this is the most efficient way to do it - Kaiser has a wiki and fancy chart that show this).
My thinking is that the wort is getting boiled anyway so I don't see a problem with this method. Maybe some of the hotbreak gets stuck in the mash but this is fine since many skim the hotbreak off anyway. Yes, you would denature the enzymes in the wort you boil but, again, the purpose of the mashout is to do just that. I frankly don't see why others aren't doing this.
This isn't a decoction because with a decoction you take the thickest third of the mash (the grains).. here you're just taking the wort. I would be hesitant to use a decoction calculator because the grains probably hold more heat than the wort, thus doing a 'wort only' decoction would probably undershoot your target temp based on a decoction calculator. The way I did my excel sheet was to treat it like an infusion for a step mash but account for the fact that the volume you add for the infusion is actually coming out of the mash (so as the infusion gets larger the mash volume gets smaller which then means that the necessary infusion volume gets smaller - it's reciprocal).
And I don't see why you'd add water to the wort to do this. I don't think that accomplishes anything. You're just wasting water that would be better employed during the sparge for maximum sugar flushing.
Edit: If you're planning on sparging with the [diluted] wort then I'd tend to agree with Ryush. You'll take a big hit in efficiency doing that. But many here employ no-sparge systems and this would be more efficient than that at least. If space is such an issue that it's limiting your sparge just do two or three sparges, you'll get better efficiency that way anyhow. Moreover, if space is that much of an issue then go to a bigger pot. I'd rather have the tower too tall than constantly be struggling with space issues in the mash tun. That said, it sounds to me like you're only planning on doing the mashout with the wort which, again, is fine IMO.
