Question

Pasture Benefits Costs Time 20 Forest+Recreation Benefits Costs 0 120 120 300 10 Consider a landowner who has property that she can use for forest and recreational (hunting) leases or for pasture. She would accrue around the same net benefits each year for pasture (sale of live cattle) but her net benefits would differ year to year for forest/recreation because she would only be able to harvest pine needles every third year although she is sure she could do recreational leases every year. She would also sell timber in the 10 year resulting in a larger net benefit in year 10. 200 1 2 3 200 120 120 30 10 200 200 300 120 120 300 500 Un nu 10 200 30 100 200 200 10 5 3) (5 points) Assuming a 4% interest rate, what is the net present value of each option? Based on what you know about economics and the time value of money, how should our landowner manage her property? Which option likely would have the best environmental outcomes? Are these ecosystem services included in the net benefits listed above?

Answer 1

Let us estimate the Net Present Value (NPV) of FOREST+RECREATION

NPV = -20 + 110(1+i)^-1 + 110(1+i)^-2 + 270(1+i)^-3 + 110(1+i)^-4 + 110(1+i)^-5 + 270(1+i)^-6 + 110(1+i)^-7 + 110(1+i)^-8 + 270(1+i)^-9 + 400(1+i)^-10

NPV = -20 + 110(1+0.04)^-1 + 110(1+0.04)^-2 + 270(1+0.04)^-3 + 110(1+0.04)^-4 + 110(1+0.04)^-5 + 270(1+0.04)^-6 + 110(1+0.04)^-7 + 110(1+0.04)^-8 + 270(1+0.04)^-9 + 400(1+0.04)^-10

NPV = $1445.22

Let us estimate the Net Present Value (NPV) of PASTURE

NPV = -40 + 195(1+i)^-1 + 195(1+i)^-2 + 195(1+i)^-3 + 195(1+i)^-4 + 195(1+i)^-5 + 195(1+i)^-6 + 195(1+i)^-7 + 195(1+i)^-8 + 195(1+i)^-9 + 195(1+i)^-10

NPV = -40 + 195(1+0.04)^-1 + 195(1+0.04)^-2 + 195(1+0.04)^-3 + 195(1+0.04)^-4 + 195(1+0.04)^-5 + 195(1+0.04)^-6 + 195(1+0.04)^-7 + 195(1+0.04)^-8 + 195(1+0.04)^-9 + 195(1+0.04)^-10

NPV = $1555.64

The results calculated above state that the pasture is more profitable to the farmer. However, the creation of forest would be an eco friendly option.