Question

Washington County's Board of Representatives is considering the construction of a longer runway at the county airport. Currently, the airport can handle only private aircraft and small commuter jets. A new, long runway would enable the airport to handle the midsize jets used on many domestic flights. Data pertinent to the board's decision appear below. Cost of acquiring additional land for runway Cost of runway construction Cost of extending perimeter fence Cost of runway lights Annual cost of maintaining new runway Annual incremental revenue from landing fees $ 67,500 260,000 10,804 35,000 17,500 32,500 In addition to the preceding data, two other facts are relevant to the decision. First, a longer runway will require a new snowplow, which will cost $130,000. The old snowplow could be sold now for $13,000. The new, larger plow will cost $9,000 more in annual operating costs. Second, the County Board of Representatives believes that the proposed long runway, and the major jet service it will bring to the county, will increase economic activity in the community. The board projects that the increased economic activity will result in $88,000 per year in additional tax revenue for the county. In analyzing the runway proposal, the board has decided to use a 10-year time horizon. The county's hurdle rate for capital projects is 15 percent.

Answer 1

H к 1 Washington County 2 3 1.Initial Cost of runway 4. 5 Cost of land 67500 6 Cost of runway construction 260000 7 Cost of peremeter fence 10804 8 Cost of runway lights 35000 9 Cost of new snowplow 130000 10 Initial Cost of runway 503304 11 12 2.Revenue from lending fee 32500 13 Revenue from increased activity 88000 14 Total annual revenue 120500 15 16 costs: 17 Maintenance of runway 17500 18 Plow operating cost 9000 19 Total costs 26500 20 Annual increase in revenue 94000 21 22 3.Cash flow analysis 23 24 Year 25 Initial Cost of runway -503304 26 Sale of old snowplow 13000 27 Annual cash flow from revenue 28 Net cash flow -490304 29 IRR 14.00% 2 3 4 5 7 8 9 10 94000 94000 94000 94000 IRR(B28:L28) 94000 94000 94000 94000 94000 94000 94000 94000 94000 94000 94000 94000 94000 94000 94000 94000