The EPA debating preserving a section of wilderness as a protected area. The land is owned by a rancher who has offered to lease the land to the government for 20 years in return for an immediate lump sum payment of 1.8 million The Environmental Protection Agency has estimated that the preserved land would generate 110,000 per year in benefits to hikers, hunters and bird watchers. The interest rate is 4 percent.
a. Should the agency proceed with this preservation effort?
b. An analyst in the agency argues that the annual benefits are likely to grow at a rate of 2 percent per year. Should the agency proceed with the preservation effort now?
c. The rancher who owns the land is willing to sell the land for 2 million. Should the agency proceed with the preservation effort (with no end date), assuming that annual benefits are steady at 110,000 per year?
d. Now the rancher is willing to sell the land for 3 million. The benefits of the wilderness start at 110,000 per year and grow at a rate of 2 percent per year (as in b) for a 20 year period. Since the government owns the land, it will have the option to resell the land at the end of the period for 2 million. Should the agency proceed with the preservation effort?