you are the mayor of the small town of wasilla and a landowner has offered to sell you 1000 hactares of woodland for $2000,000. You are very tempted because of the wildlife which live there (such as 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 is 5% Your Parks department estimates that annual recreational and environmental benefits will be $1000,000 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 enviromental benefits increase by 3% per year, refleccting the fact that wasilla is growing, not only in population but in income of the population?

2. 1. An investment of $100 today will avoid $1,000,0

00 of environmental damage in 100 years.

a)

At a discount rate of 10%, is this investment a goo

d idea?

b)

At a discount rate of 1%, is this investment a good

idea?

c)

At a discount rate of 2%, what is the maximum we wo

uld be willing to pay to avoid the

million dollars of environmental damage in 100 year

s?