Showing papers on "Present value of costs published in 2002"

Transaction Costs and the Present Value “Puzzle” of Farmland Prices

Abstract: 1. Introduction Farmland is by far the dominant asset in the U.S. agricultural sector's balance sheet, accounting for about two-thirds of the value of all farm assets (USDA, various years). The value of U.S. farmland was estimated at $593 billion on December 31, 1994, or roughly 10% of total market capitalization for firms in the SP Clark, Fulton, and Scott 1993; Tegene and Kuchler 1993). This is a "puzzling" result because the CDR-PVM has been widely accepted and generally used for land appraisal purposes. Beyond this, however, there is surprisingly little consensus regarding the determinants of farmland prices (Pope et al. 1979; Robison and Koenig 1992; Stare 1995). A major reason for this lack of consensus may be the heterogeneity of the data sets used for empirical analysis. Different studies use different levels of aggregation, different time periods, and different land value and rent series. Hanson and Myers (1995), for example, use country-level data, whereas Tegene and Kuchler (1993) use regional data and Just and Miranowski (1993) use state-level data. Hanson and Myers (1995) use data from 1910 to 1990, Shiha and Chavas (1995) use data from 1949 to 1990, and Brown and Brown (1984) use data from 1968 to 1981. Falk (1991) examines farmland values and gross cash rents, whereas Hanson and Myers (1995) examine farm real estate values and residual returns to farm real estate. Another possible explanation for the lack of consensus about farmland pricing, and the focus of the present study, is the presence of market frictions. Our motivation for exploring the role that market frictions might play in determining farmland prices is both theoretical and empirical. On the theoretical level, market frictions drive a wedge between the price at which outsiders wish to buy land and that at which farmers wish to sell it. The market price can be anywhere within this wedge, and thus can easily deviate from its frictionless present value. One can interpret this wedge as a band of inaction [delta^sup L^, delta^supU^], inside which farmers neither buy nor sell land even in the face of changing expected returns. The band is centered on the price that would prevail in the absence of transaction costs, and its width is determined by the size of these costs. On the empirical level, a review of the literature reveals that the frictionless market assumption is not a realistic representation of how farmland is actually traded. Although the costs associated with trading many financial assets are small, costs incurred in transferring ownership of farmland typically exceed 7.5% of the purchase price. To explore the role of market frictions, we use the PVM recently used by Lence and Miller (1999), which explicitly incorporates proportional transaction costs. …

Average costs versus net present value: A comparison for multi-source inventory models

Abstract: While the net present value (NPV) approach is widely accepted as the right framework for studying production and inventory control systems, average cost (AC) models are more widely used. For the well known EOQ model it can be verified that (under certain conditions) the AC approach gives near optimal results, but does this also hold for more complex systems? In this paper it is argued that for more complex systems, like multi-source systems, one has to be extremely careful in applying the AC approach on intuition alone, even when these systems are deterministic. Special attention is given to a two-source inventory system with manufacturing, remanufacturing, and disposal, and it is shown that for this type of models there is a considerable gap between the AC approach and the NPV aprroach.

Transaction Costs and the Present Value

Abstract: The present study introduces a theoretical land pricing model that allows for proportional transaction costs, and a corresponding kernel regression test The model is tested with farmland returns data for 20 individual states, and also with two aggregate US level series The constant discount rate (CDR) present value model (PVM) of farmland prices is strongly rejected However, it is found that the behavior of land prices and rents is consistent with the CDR-PVM in the presence of empirically observed values of transaction costs Findings are very robust in that they apply to both individual state-level data and the US aggregate level series