Stream of benefits and net present value

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Dear Editor,

Re: The issue of land at Ti’avea

I was trying to find the best way to respond to this letter until this old lady at the makeki whispered in my ear, tell him about stream of benefits and net present value. 

Then it dawned on me that the confusion between your letter and mine is due to the use of present value. While it is arguable that the present value of Tiavea land is low, this is not the methodology for working out the price one should pay for an asset. 

A better methodology according to this old lady at the makeki is to consider the stream benefits (using whatever time period you may choose) from using the land and discounting this to get its net present value (NPV) using an appropriate discount rate. 

The stream of benefits takes into account the possible uses to which the land can be put including doing nothing. According to this methodology, the present value of the Tiavea land over one year, for instance, is the benefits from using that land. If it is used for agricultural farming then the present value is different if the land is allowed to lie fallow. In the case of the land for the airport, the stream of benefits will be those from the use of the airport, etc. Since the land is going to be sold, then the time period is quite long.

Value of land once it has been developed is already incorporated into its selling price. Salelologa villagers were quite right is agitating for a different outcome based on their NPV calculations.

Let me turn to your example of an athlete (a footballer in this case). At the beginning of his career, he signs a contract to play, the value of that contract dependent on the stream of benefits he is going to produce for his club. 

The stream of benefits include the moneys he could attract to the club through sponsorship, by playing well and helping the club win championships. 

The stream also takes into account the experience of the athlete, his present physical condition and his likelihood of getting into trouble socially. Some of the calculations is done using a pre-determined method (the market value of a prop against the value of a winger) and other calculations are based on gut feeling. In any case, the NPV of the benefits determine the value of the contract. How the player performs after his contract is signed has no bearing on the value of the current contract, but will affect his next contract.

As an aside, my relative who lives in western Sydney tells me that the price of vacant land outside of Mt. Druitt has gone up because the government is building an airport nearby. 

The land is still vacant and there is nothing within kilometers but the land value has already factored in the stream of benefits which would accrue to the landowners from being near the airport.

By the way, I agree with your views of the recalcitrant faifeau’s who do not comply with the taxation law. Ma lo’u fa’aaloalo lava

 

Vai Autu 

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