The environmental protection agency of a county would like to preserve a piece o

Question

The environmental protection agency of a county would like to preserve a piece of land as a wilderness area. The current owner has offered to lease the land to the county for 20 years in return for a lump-sum payment of $1.1 million, which would be paid at the beginning of the 20-year period. The agency has estimated that the land would generate $110,000 per year in benefits to hunters, bird watchers, and hikers. Assume that the lease price represents the social opportunity cost of the land and that the appropriate real discount rate is 4 percent. Assuming that the yearly benefits, which are measured in real dollars, accrue at the end of each of the 20 years, calculate the net benefits of leasing the land.

Explanation / Answer

The present value of the real yearly benefits is most easily calculated using the

formula for the present value of an annuity

Present value of an annuity = P*((1-(1+r)^(-n))/r)

Where P is the future value given, R is the time period and n is the number of years.

n=20

r=0.04(4%)

P = 110000

PV(benefits) =(110000)*((1-(1+0.04)^(-20))/(0.04))

= 1494936

NPV = 1,494,936 - 1,100,000 = 394,936

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.