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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.
a) Assuming that the yearly benefits, which are measured in real dollars, accrue at the end of each of the 20 years, calculate the net present value of leasing the land.
Can solve discounted value of all benefits using Excel's PV formula (only works when PMT is constant value over time):
b) 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 netpresent value assuming that they are correct.
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