Question

Aaron’s Amazon Ranching, Inc. is planning on cutting down the Amazon rainforest in order to graze cattle for beef for South American McDonald’s franchises. After including the costs for cutting down the forests and turning it into grazing land, Aaron estimates that he can intensely graze cattle for a period of 5 years, making a profit of $3 million each year. (Assume zero inflation.) After that period, the grazing will exhaust the land and he will have to move on to other land. Aaron makes a 10% profit rate in his ranching business, so he will use that as the discount rate. Use this information to answer questions 11-14. What is the value of intensive grazing to the business in the 3rd year? An NGO, Save the Rainforest, proves to Aaron that if he does not cut down the forest, but waits 10 years, the forest left standing will have value as an ecosystem for medicine, ecotourism, and other uses. He will be able to then sell the land for $30 million. How does Aaron think of that $30 million today (i.e. in monetary terms, what’s it worth)? Assume that the total discounted value of intensive grazing (through the full five years at 10% discount rate) is $12.5 million? Will Aaron wait to cut down the forest? Why or why not? As an environmental economist working for Save the Rainforest, you argue with Aaron about his choice of discount rate. What might you say to him and would it change his answer above (#13) about cutting down the forest?

          Aaron’s Amazon Ranching, Inc. is planning on cutting down the Amazon rainforest in order to graze cattle for beef for South American McDonald’s franchises. After including the costs for cutting down the forests and turning it into grazing land, Aaron estimates that he can intensely graze cattle for a period of 5 years, making a profit of $3 million each year. (Assume zero inflation.) After that period, the grazing will exhaust the land and he will have to move on to other land. Aaron makes a 10% profit rate in his ranching business, so he will use that as the discount rate. Use this information to answer questions 11-14. What is the value of intensive grazing to the business in the 3rd year? An NGO, Save the Rainforest, proves to Aaron that if he does not cut down the forest, but waits 10 years, the forest left standing will have value as an ecosystem for medicine, ecotourism, and other uses. He will be able to then sell the land for $30 million. How does Aaron think of that $30 million today (i.e. in monetary terms, what’s it worth)? Assume that the total discounted value of intensive grazing (through the full five years at 10% discount rate) is $12.5 million? Will Aaron wait to cut down the forest? Why or why not? As an environmental economist working for Save the Rainforest, you argue with Aaron about his choice of discount rate. What might you say to him and would it change his answer above (#13) about cutting down the forest?

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