Question

You are advising the small town of Blackrock regarding future plans for 1,000 acres of forest located near the town. The owner of the forest has offered to sell the land to the town for $2,000,000. The forest provides many recreational benefits for local residents, as well as being the home of much wildlife including an endangered species. After conducting several studies you estimate that the annual recreational and environmental benefits will be $100,000 per year. (please use 6% as the discount rate )

a) Considering only the next 50 years, is buying the forest a good idea for the town? Why or why not?

b) What is the maximum amount the town would be willing to pay the landowner to lease the land for 50 years? Explain why.

c) How would your answers to parts a) and b) change if the recreational and environmental benefits increase by 3% per year, reflecting the fact that the town is growing, not only in population but also in income of the population? Explain.

d) Which methods of benefit estimation would you use to estimate i) the recreational benefits, and ii) the environmental benefits of the forest? Explain the reasons for your choice and describe how you would undertake each study (maximum 100 words).

Answer 1

a) Considering only the next 50 years, is buying the forest a good idea for the town? Why or why not?

Ans. annual recreational and environmental = $100,000 per year

Discount rate = 6%

Sale value of land to the town = $2,000,000

Present value of future benefits = 100000 PVAF(6%,50)

= 100000 * 15.7619

= $ 1,576,190

It would not be good idea to purchase forest as Sale price exceeds present value of future benefits for next 50 years.

b) What is the maximum amount the town would be willing to pay the landowner to lease the land for 50 years? Explain why.

Ans. Present value of future benefits = 100000 PVAF(6%,50)

= 100000 * 15.7619

= $ 1,576,190

Maximum amount that town would be willing to pay the landowner to lease the land for 50 years will be $ 1,576,190.

c) How would your answers to parts a) and b) change if the recreational and environmental benefits increase by 3% per year, reflecting the fact that the town is growing, not only in population but also in income of the population?

Ans. If there is also increase in income by 3% per year. The town can offer more selling price than calculated in parts a & b. Due to 3% increase present value of future payments will increase, which will justify purchasing forest land for town.

d) Which methods of benefit estimation would you use to estimate i) the recreational benefits, and ii) the environmental benefits of the forest? Explain the reasons for your choice and describe how you would undertake each study

Ans. i) the recreational benefits :The method use to estimate recreational benefits will include benefit transfer, touristic recreational Value, forest's resources, etc. There is no single factor to decide recreational value of forest. There would be bunch of factors as discussed above that needs to be taken into consideration to estimate benefits from recreational activities.

ii) the environmental benefits of the forest : The benefits provided by forest ecosystems include goods such as timber, food, fuel and bioproducts. Ecological functions such as carbon storage, nutrient cycling, water and air purification, and maintenance of wildlife habitat. Based on these factors, environmental benefits of the forest will be determined.