Question 4: Changing Benefits (40 points)

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 in perpetuity in return for a lump sum payment of $1 million, which would be paid at the start of the project.The agency has estimated that the land would generate $100,000 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 5 percent.

(a)(10 pts) Assuming that the yearly benefits, which are measured in real dollars, accrue at the end of each year, calculate the net benefits of leasing the land.

(b)(10 pts) 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. (c)(10 pts) Some analysts in the agency argue that the annual real benefits are likely to decrease at a rate of 2 percent per year due to climate change and urbanization impacts. Recalculate the net benefits assuming that they are correct. (d)(10 pts) How would you answer in

(c) change if there were maintance costs of $50,000 per year? Assume the project can be renew (or cancelled) in a year by year basis.