Reference no: EM13342819

The environmental protection agency of a county would like topreserve a piece of land as a wilderness area. The current owner has offered to lease the land tothe county for 20 years in return for a lump sum payment of $1.1 million, which would be paid atthe 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 pricerepresents the social opportunity cost of the land and that the appropriate real discount rate is 4percent.

a) Assuming that the yearly benefits, which are measured in real dollars, accrue at the endof each of the 20 years, calculate the net present value of leasing the land.

b) Some analysts in the agency argue that the annual real benefits are likely to grow at a rateof 2 percent per year due to increasing population and county income. Recalculate the netpresent value assuming that they are correct. benefit growth rate: 0.02.