No, I am not referring to a trip to Europe and exchanging a stack of dollars for a much smaller stack of Euros. I am talking about what happens when I am promised a financial payoff in the future in exchange for providing a financial benefit today. Bankers figured this concept out 100’s of years ago when they developed the concept of a mortgage. Basically it is this…Would you rather have me give you a dollar today or a dollar one year from today? I think most of us would prefer to have the dollar in our pocket today. Why is that?
The reason is that if I have a dollar today I can put it in a savings account and earn interest on the dollar. Let’s assume I can earn 5% on my dollar so that a year from today I will have $1.05. So when we are pondering the dollar today vs the dollar next year we can see the choice is actually would you rather have $1.05 today or $1.00 one year from now. If we take the same idea and flip it around we can actually say that if I lose the opportunity to put the dollar in my saving account today and earn interest on it the dollar I receive next year is really not worth a dollar. I could say that my the dollar received 1 year from today is actually only worth $0.95. This is a very simplified way to look at two important financial concepts, Net Present Value, NPV, and Net Future Value, NFV. In the first comparison we showed that when comparing the two scenarios, a dollar received today compared to a dollar received in one year, the Net Present Value, NPV, of the dollar received today is $1.05 and the opposite comparison is the dollar received next year has a Net Future Value, NFV, of $0.95 all other things being equal.
You are probably asking yourself why even bother to make the calculations? When you are starting a project like the Larcom renovation to accommodate the Police and Municipal Court, and you start comparing possible scenarios that extend out 60 years, the calculations can drastically alter your decisions. This is the mistake that Councilman Greden made when he announced at the June 2, 2008 City Council meeting that if we build the new Police Court facility at Larcom it would save the City $52,000,000. Councilman Greden was correct it would save the City $52,000,000 but the City would not benefit from the savings for 50 years!
If we apply the concept of NFV of $52,000,000 received 50 years from now the savings actually turns into a loss and he would have been forced to vote the opposite way on the bond issue. This kind of mistake when you are dealing with your own money can make YOU look foolish. These mistakes when you are dealing with taxpayer money…your money makes US all look foolish.
It may be too late to stop this project, but the lesson we need to learn is that our elected city officials must have the skill set to help them make complex financial decisions. The stakes are high. The City General Fund budget is $80M and if you add in the other City accounts our elected officials are handling 100’s of millions more.
I have an MBA plus a very strong background in finance and accounting. As a small business professional, entrepreneur, business consultant and Angel Investor I have learned how to make these kinds of difficult decisions. I hope you will give me a chance to offer another independent voice, analytical mind and listening ears to the council that will help us make efficient use of your money.