Survey data has been gathered from 500 hikers who visited a forst in a neighboring state. Using regression analysis, economists have controlled for differences in income, employment status, age and other important factors that might affect the number of hiking trips taken. Taking these factors into account, the demand for hiking for the average individual is C=100-10T where C represents the cost per hiking trip for the average person and T is the number of hiking trips per year taken by the average person. Further analysis indicates that the average person from the group of 500 hikers will take four hiking trips per year. Using the averafe individual's demand function for hiking, this means that the cost of each of these four trips is $60. If we use the average person's demand function to represent a marginal benefit function, this person's net benefit for the four hikes is $80.
Based on the demographic data about people living in the vicinity of the proposed park, it is estimated that 50,000 eople will take an average of four hiking trips per year and the net benefit for each of these individuals is the $80 determined above. It is also estimated that the cost of developing the hiking trails will be $30 million in period zero and $20 million in period one. Beggining in period 2, the only expense will be an annual maintenance cost of $200,000 which will be encountered over the remaining years of the period analysis. The hiking trails are not avaliable for use in period zero and period one, but can be used beginning in period two.
Undertake the benefit-cost study of this project where you are asked to find the value of the annual benefits and costs with the ultimate objective being to calculate the present value of net benefits for this project. Assume that the analysis is to cover a 25-year period and the interest rate is 4 percent.
Finally, complete a sensitivity analyses where alternative rates of 5 percent and 6 percent are used. What is the outcome with these different interest rates?