A foreign company plans to clear several dozen acres of ecologically valuable rainforest in the Brazilian Amazon for the creation of a cattle ranch.

A foreign company plans to clear several dozen acres of ecologically valuable rainforest in the Brazilian Amazon for the creation of a cattle ranch. This decision will create economic profits of $3,000/year to the company (which hires substantial numbers of local villagers) after one year of construction but will cost $14,300 (paid upfront) to build. In addition, the loss of forest will eliminate vital habitat and productive fruit trees—thus reducing the value of hunting and foraging activities by local villagers from $1,200 to $500 per year. Assume that these losses are experienced from the very first (construction) year onward and are permanent.

(a) Assume that the discount rate is 4% (r=.04) and the evaluation horizon is 12 years from the present. Please neatly fill the blanks in the table below (assuming you are working from a social perspective and counting all costs and benefits). See table attached

(b) What is the net present value of this proposed project? If efficiency was the only objective for making the decision and we have fully accounted for all costs and benefits would you recommend the project go ahead or not?

(c) Would the demonstration of a $1.00 per family average willingness to pay for the preservation of the Amazon on the part of middle to upper-class families in developed countries change your perception of the efficiency of this project? (Yes/no and why?). HINT: Based on very simple research you can conduct online, to a rough order of magnitude how many middle/upper-class families are there?

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