Answer to Question #243893 in Finance for Queen

Question

You have been asked to evaluate whether a project to preserve an area of forest should

go ahead or whether the land should be converted to agriculture. The net benefits of

ecosystem goods and services have been valued over the next four years at R6000, R10

000, R14 000 and R22 000 respectively. The immediate cost of preserving the forest is

R23 500. Assume that MWTP = 90 - 3Q and MC = 10 + 2Q. The discount rate is 7%.

Answer 1

Calculation of present value of net benefit with assumption that net benefit receives at the end of the year :

As per results,

Immediate cost of preserving forest = 23,500

Net benefits at present value       = 42,554        (round off )

After adjusting the immediate cost,

Pure net benefits ( 42554 - 23500 )  = 19054

 

As we can observe that preserving forest is not loss making deal so we should opt the first option of preserving forests.