Which Governor Can do NPV and Relate it to State Finances?

The answer the headline question is none other than Governor Sarah Palin.

This photograph was featured on Team Sarah and generated several positive comments. This entry will explain briefly what Net Present Value of Cash Flow (NPV) is and how it relates to Governor Palin’s work.

From my University of Phoenix (UoP) “Wealth Maximization Concepts Worksheet” the following distills exactly what NPV is:

Net present value (NPV) considers the value of one dollar today versus the value of that dollar in the future by discounting cash flows (Ross, et al., 2005, p. 144). The authors consider NPV to be the most reliable method by which to value a corporate project (p. 146). NPV “uses cash flows,” not earnings (p. 146). The method “uses all cash flows” for all dates (p. 146), and the method properly discounts the cash flows (p. 146).

The one-period case calculates NPV for a single decision, such as purchases, saving, or investing (p. 60). Present value is equal to cash flow divided by one plus the rate of return (p. 61).

The multi-period case is most applicable to lending and borrowing involving either simple or compounded interest (p. 64).

The more frequent the compounding period, the greater the effective annual interest rate (p. 73). For instance, $1,000 earning 10% with annual compounding would have an effective interest rate of 10.516% with daily compounding.

Commentary

Alaska’s taxes originate mainly from oil, resulting in a highly unstable state income source. As noted in other entries, Alaska under Governor Palin’s leadership has consistently run surpluses. This literally puts other governors across the country to shame, for the rest have tax income bases that are quite stable, and yet they seem to be masters of running enormous deficits, then having to raise all manner of taxes to stop the financial hemhoraging.

Governor Palin uses NPV to compute the future value of her state’s income with a high degree of accuracy. She is able to use this calculation in conjunction with her knowledge of oil and other energy prices. NPV is taught in MBA courses like the one I took (UoP MBA-540, “Maximizing Wealth for Shareholders”), but Governor Palin got her MBA from the School of Hard Knocks — which is where it really counts.

How many of our nation’s governors can compute NPV? How many even know what NPV is? Now you know that one can. The one who can is not who you’d expect it to be. It’s not a Northeast elitist from Yale or Harvard. The one who can is not a good old boy who’s been around since the year one.

The one governor who can compute an NPV and relate it to state tax revenue is a woman from a small Alaskan town.

Ross, S.A., Westerfield, R.W., & Jaffe, J. (2005). Corporate Finance. New York, NY: The McGraw Hill Companies.

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