Quote:
Originally Posted by Haech
Are there more appropriate methods of discounting future than the interest rate?
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Nearly 20 years ago I wrote capital expenditure evaluation software based on the Australian governments accounting methods then.
While we used development forecasting back then, predicting the future is iffy (as well as future Internal Rate of Return, IRR) at best so (after my program produced the report based on a fixed discount rate) it plotted the respective project alternatives discount rate (y axis 1-75%) verses the projects Net Present Value (NPV calculated for the different discount rates, x axis) to give a better understanding of the impacts of varying discount rates over time when IRR is uncertain.
It's interesting to note that at this time our interest rate was nearly 20% and legislated future income tax reductions were never provided because the plot of discount rates shows the same IRR at 2 distinct Discount rates, particularly if the expenditure is in the not near future and interest rates are high. If the interest rate drops there is no capacity to generate the much larger amount of money eventually required to pay for the promised cuts.
While it's easy to tell, since most of our public assets have/are being sold, that the commercial in confidence agreements covering public asset were designed to deliberately hide from the public the missing component in the algorithm used today vs 1990 in Australia, surely these agreements subvert the publics right to know about these hidden costs on the public purse.
While depreciation may be defined as compensation for the loss of value of an asset over time, and one would expect that the consolidated value of the depreciation would be saved in a sinking fund to actually replace the asset when it has no value (I'm not going to argue about financial value and economic value apart to say that as this financial benefit is derived from public largess to business, the 2 should be the same) should the government declare to the public that the $100 million dollar asset sold will mean that over the next 20 years, the business buying the asset can deduct the value of the asset from their expenses, pre tax, meaning that the asset is actually worth 100-(100*business tax rate) (simplistically) to the public purse over those 20 years.
Arguments that our government would have worn the depreciation expenses anyway don't wash when you consider that our government would have also owned the asset! Then also consider accelerated depreciation, another hidden stimulus expense, i.e 100 million depreciated over 10 years, sold, then depreciated again in its entirity is very dangerous especially if the value of the asset increases (real or artificial). And I'm not going to get into the shysters who have blown the NPV of their asset because it was a component of their financial deal to buy the asset and was stripped off at the start as such, and the asset then blows up because market conditions drop and they cannot afford to maintain their asset. If I had a go at those dirty shysters I'd also have to have a go at those dirty underhanded congenital criminal politicians who set up a system that allows this to happen, and then doubles it and hides the real cost from the public.
I hate to tell you that Australia's economic miracle is based on public usury.
Our big banks generate approx 10 billion in profits per year and also bring in around 10 billion of user paid fees and charges (unless you owe them heaps of money or go to primary school you pay, I am not kidding) each year too. In 1992 when I studied Maths of Finance at uni fees and charges were just starting to creep in.
Just to do some v quick calcs, say Australia's population is 20 million and fees and charges are 10 billion, if this userous system were applied in the US (England has laws against this abuse) the big banks would make approx 180 billion dollars per year from the people who don't owe money through loans from those banks.
Yes there probably are appropriate ways as long as responsible government blocks off the inappropriate ways from deliberate abuse and doesn't try to hide any hidden expenses from public scrutiny.
