you are the mayor of the smalltown of wasilla and a landowner has offered to sell you 1,000 hectares of woodland for $2,000,000. YOu are very tempted because of the wildlife which live there(such a moose) as well as the recreational value to your constituents . you look at the financial times and see that if you borrow money  for this project, the interest rate will be 5% per annum, and so conclude the discount rate you should use 5%. your parks department estimates that annual recreational and environmental benefits will be $100,000 a year.a) looking only at the next 50 years, is buying the woodland a good idea? b) what is the maximum amount you would be willing to pay the landowner to lease the land for 50 years? c)How would your answers to a and b change if the recreational and environmnetal benefits increase by 3% per year, reflecting the fact that wasilla is growing, not only in population but in income of the population?

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Asked Sep 30, 2019
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you are the mayor of the smalltown of wasilla and a landowner has offered to sell you 1,000 hectares of woodland for $2,000,000. YOu are very tempted because of the wildlife which live there(such a moose) as well as the recreational value to your constituents . you look at the financial times and see that if you borrow money  for this project, the interest rate will be 5% per annum, and so conclude the discount rate you should use 5%. your parks department estimates that annual recreational and environmental benefits will be $100,000 a year.

a) looking only at the next 50 years, is buying the woodland a good idea? 

b) what is the maximum amount you would be willing to pay the landowner to lease the land for 50 years? 

c)How would your answers to a and b change if the recreational and environmnetal benefits increase by 3% per year, reflecting the fact that wasilla is growing, not only in population but in income of the population? 

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Expert Answer

Step 1

a) If the buying the woodland will be good decision only when the net present value of benefit is greater than that of the net present value of cost of land. It can be calculated as follows;

1
11
1-
(1+r)
NPV FV
1
(1+0.05)0
0.05
-100, 000
1
1-
11.46739
0.05
-100, 000
=100,0001-0.08 720
0.05
100,000x18.255924
1,825,592.4
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1 11 1- (1+r) NPV FV 1 (1+0.05)0 0.05 -100, 000 1 1- 11.46739 0.05 -100, 000 =100,0001-0.08 720 0.05 100,000x18.255924 1,825,592.4

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Step 2

Thus, the NPV of land is $1,825,592.4. The cost of land is given as $2,000,000. As the net present value of benefit is less than that of the net present value of cost of land, it is not a good decision to buy the land.

Step 3

b) The maximum amount that would pay ...

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