Infinite planning horizon, land opportunity cost and Faustmann methodology
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Universidade Federal de Lavras
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The paper studied and discussed The Faustmann Method (Land Expected Value - LEV) comparing it with The NetDiscounted Value project evaluation criterion, in an infinite horizon (NDV ). The method was applied for determining land value,envisaging eucalyptus plantation in savannah area (cerrado) in Brazil, for the purpose of charcoal production. For the same situationthe Net Discounted Value was applied and compared. The costs considered were establishment, maintenance and harvesting and thatthe forest was managed with the substitution being done after cutting the original establishment at seven years of age, that is, there isno coppicing transport. The substitution cost was considered equal to that of establishment. The only income considered was the saleof the wood produced for energy (250 st/ha) at the price of US$ 7.10/st in the cutting age. The main conclusions were: For anydiscount rate, LEV is always a larger value than NDV , because NDV considers land in the relationship of costs; the assumption thatland only has value for wood production, implied by Faustmann methodology, doesn t have theoretical nor practical support; if thereis no alternative for land use, then its opportunity cost is zero and there would be no reason to determine its value; land productivevalue is not the only value that enters in the formation of its price. The Faustmann methodology doesn t capture the other factors thataffect land price, for instance, the speculative effects, cultural values, land protective value, protection against inflation and of statusattribution, etc..; LEV indicates how much can be spent in any cost item left out of the calculations
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