The environmental protection agency of Verdesi 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 not yet estimated benefits, but has observed the following in two other very similar counties: Entry Fee $0.75 $0.50 County Sanders Liu Annual Visitors 55,000 110,000 Assume that the lease price represents the social opportunity cost of the land and that the appropriate real discount rate is 4 percent. A. Calculate the annual benefits accruing to recreational users of the Verdesi County preservation, assuming that the county does not charge any entry fee. B. 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. C. Some analysts in the agency argue that the annual real benefits are likely to grow at a rate of 2 percent per year due to increasing population and county income. Recalculate the net benefits assuming that they are correct. D. Imagine that the current owner of the land was willing to sell the land for $2.1 million. Assuming this amount equaled the social opportunity cost of the land, calculate the net benefits if the county were to purchase the land as a permanent wildlife refuge. In making these calculations, first assume a zero annual growth rate in annual real benefits; then assume that these benefits grow at a rate of 2 percent per year.
The environmental protection agency of Verdesi 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 not yet estimated benefits, but has observed the following in two other very similar counties: Entry Fee $0.75 $0.50 County Sanders Liu Annual Visitors 55,000 110,000 Assume that the lease price represents the social opportunity cost of the land and that the appropriate real discount rate is 4 percent. A. Calculate the annual benefits accruing to recreational users of the Verdesi County preservation, assuming that the county does not charge any entry fee. B. 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. C. Some analysts in the agency argue that the annual real benefits are likely to grow at a rate of 2 percent per year due to increasing population and county income. Recalculate the net benefits assuming that they are correct. D. Imagine that the current owner of the land was willing to sell the land for $2.1 million. Assuming this amount equaled the social opportunity cost of the land, calculate the net benefits if the county were to purchase the land as a permanent wildlife refuge. In making these calculations, first assume a zero annual growth rate in annual real benefits; then assume that these benefits grow at a rate of 2 percent per year.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The environmental protection agency of Verdesi 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 not yet estimated benefits, but has observed
the following in two other very similar counties:
County
Sanders
Entry Fee
$0.75
$0.50
Annual Visitors
55,000
110,000
Liu
Assume that the lease price represents the social opportunity cost of the
land and that the appropriate real discount rate is 4 percent.
A. Calculate the annual benefits accruing to recreational users of the
Verdesi County preservation, assuming that the county does not
charge any entry fee.
B. 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.
C. Some analysts in the agency argue that the annual real benefits are
likely to grow at a rate of 2 percent per year due to increasing
population and county income. Recalculate the net benefits assuming
that they are correct.
D. Imagine that the current owner of the land was willing to sell the land
for $2.1 million. Assuming this amount equaled the social opportunity
cost of the land, calculate the net benefits if the county were to
purchase the land as a permanent wildlife refuge. In making these
calculations, first assume a zero annual growth rate in annual real
benefits; then assume that these benefits grow at a rate of 2 percent
per year.
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