1. Calculating the Net Present Value of Environmental Projects with Future Costs and Benefits
Bar-tailed godwits are birds that migrate between their (northern summer) nesting sites in Alaska non-stop all the way down to (southern summer) tidal estuaries in New Zealand . Ideal southern habitats are undisturbed muddy estuaries or lagoons.
Suppose that an estuary near Christchurch has seen a major drop in the number of migrating godwits, with the decline attributed to damage to the estuary caused by construction-related landfill after the earthquakes. A “Bring Back the Godwits” group forms, and petitions the local council to restore the estuary to its pre-quake condition (clearing landfill, and restoring plantings.) The group is asked by the council to prepare an estimate of the costs of restoration, and the benefits to those people in Christchurch who enjoy observing the in- and out-migration of the birds. (Benefits to the godwits themselves are ignored, since if they do not migrate to the estuary, they will likely migrate to other more remote locations in New Zealand.) The council asks the group to consider a 20 year time horizon (from year 0, 1, 2, …19, 20), and use an annual time discount rate of delta (δ) = .05 (i.e. 5%).
The group estimates that estuary restoration costs would be $30,000 in Year 0, $492,850 in Year 1, $300,000 in Year 2, and then an ongoing cost of $10,000 for each of Years 3-20. On the benefit side, based on a contingent valuation analysis of a representative sample of Christchurch residents, the group estimates aggregate benefits of restoration would be zero in Years 0 to 3, $40,000 in Years 4 to 5, and $100,000 for each of Years 6 to 20.
a. Based on the data collected by the group, calculate the net present value (NPV) of the estuary restoration to two decimal places. Would the estuary restoration be a potential Pareto improvement?
b. Given the timing of the costs and benefits of the project, would the estuary restoration be a potential Pareto improvement if the council required a higher discount rate be used? (You should not need to provide calculations to answer this question.)
