Infinite planning horizon, land opportunity cost and Faustmann methodology

Abstract

The paper studied and discussed The Faustmann Method (Land Expected Value - LEV) comparing it with The Net Discounted 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 situation the Net Discounted Value was applied and compared. The costs considered were establishment, maintenance and harvesting and that the forest was managed with the substitution being done after cutting the original establishment at seven years of age, that is, there is no coppicing transport. The substitution cost was considered equal to that of establishment. The only income considered was the sale of 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 any discount rate, LEV is always a larger value than NDV , because NDV considers land in the relationship of costs; the assumption that land only has value for wood production, implied by Faustmannmethodology, doesn t have theoretical nor practical support; if there is no alternative for land use, then its opportunity cost is zero and there would be no reason to determine its value; land productive value is not the only value that enters in the formation of its price. The Faustmannmethodology doesn t capture the other factors that affect land price, for instance, the speculative effects, cultural values, land protective value, protection against inflation and of status attribution, etc..; LEV indicates how much can be spent in any cost item left out of the calculations.