homework_4_answer_key - CED 201, Spring 2010 Homework, 4...

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CED 201, Spring 2010 Homework, 4 answer key #1. Suppose you as an environmental economist and a nature lover are contemplating to propose for a particular land to be set aside for preservation of wilderness area in your County. Preservation costs real money since land is not used for other productive uses. The County officials would like to know the benefits of preserving the land before they decide to accept your proposal. As you know the market treats the value of the wilderness area to be zero since the land is not used for marketable goods. However you can use non-market valuation techniques to attach value to these non-market services. Imagine that the land owner has offered to lease the land to the county for 10 years for a lump sum of $550,000, which would be paid at the beginning of the lease contract. You estimated the benefits to hunters, bird watchers, and hikers to be $100,000 every year for the next 10 years. Note that the cost of leasing (i.e. the $550,000) represents the forgone profit for not using that land for other purposes (or simply put the cost of preserving the wilderness area) See the following table for the stream of costs (C) and benefits (B) over 10 years(t) time. (t) 0 1 2 3 4 5 6 7 8 9 10 B ($) 0 100,00 0 100,00 0 100,00 0 100,00 0 100,00 0 100,00 0 100,00 0 100,00 0 100,00 0 100,000 C ($) 550,00 0 0 0 0 0 0 0 0 0 0 0 Answer the following questions based on the information provided. a) What is the present value of the benefit accruing in year 2 if the discount rate is 6%? PV = 100,000/(1+r) 2 = 100,000/(1.06) 2 = $89,000 b) Calculate the present value of the benefit accruing in year 10 using 6% discount rate. PV = 100,000/(1+r)
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This note was uploaded on 05/05/2010 for the course CED 201 taught by Professor Bayoudemeke during the Spring '10 term at Pennsylvania State University, University Park.

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homework_4_answer_key - CED 201, Spring 2010 Homework, 4...

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