The lands in question can be utilized for oil extraction. If the state permits drilling, they will receive royalties from the drilling equal to 12.5% of total oil sales revenue. The volume of oil and gas that can be extracted from the area of land1 are provided in table 1 below. The projected prices of oil and gas are also listed in table 1.
The grasslands portion of the federal lands in question are currently used for grazing and generates $120 thousand per year in revenue. If the state decides to allow drilling, grazing opportunities will be limited (projected revenue from grazing is 50 thousand per year)
Management of the land is costly. The cost of management is dependent on many variables, but you are given annual cost estimates for each type of management area located within the piece of land. The annual management cost is assumed to stay constant through the next decade (same every year).
Assume r=0.04
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Table 1: Projected Oil Extraction and Price (2018 -2029)
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Year
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Volume (Millions of barrels)
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Low Price (Price/Barrel)
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High Price (Price/Barrell)
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2018
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1.85
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60
|
100
|
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2019
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1.88
|
60.6
|
101
|
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2020
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1.91
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61.21
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102.01
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2021
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1.93
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61.82
|
103.03
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2022
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1.96
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62.44
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104.06
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2023
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1.99
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63.06
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105.1
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2024
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2.02
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63.69
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106.15
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2025
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2.05
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64.33
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107.21
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2026
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2.08
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64.97
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108.29
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2027
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2.12
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65.62
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109.37
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Table 2: Cost Per Year (In hundreds of thousands of dollars, in 2017 dollars)
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Management Area
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Low Estimate
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High Estimate
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Rangelands
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53.1
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118.32
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Forests
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42
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82.46
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Refuges and Hatcherries
|
31
|
48.5
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Wildfire Management
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29.5
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87.38
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a) If you assume management costs will be high (use high estimates from table 2), but benefits are low (assume low oil prices in table 1), what is the present value of owning the land for years 2018-2027?
b) If you assume high benefits (high oil prices) and low costs, what is the present value of owning the land for years 2018-2027?
c) Calculate both a high and low estimate for net present value of state ownership of lands ?