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 $ 73,500 230,000 28,567 39,000 19,500 42,500 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 $150,000. The old snowplow could be sold now for $15,000. The new, larger plow will cost $12,000 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 $118,000 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 23 percent.

Answer 1

IRR

22%

Initial cost of investment in a longer runway:

Land acquisition	(73500)
Runway construction	(230000)
Extension of perimeter fence	(28567)
Runway lights	(39000)
New snow plow	(150000)
Salvage value of old snow plow	15000
Initial cost of investment	$(506067)

Annual net incremental benefit from runway:

Runway maintenance	(19500)
Incremental revenue from landing fees	42500
Incremental operating costs for new snow plow	(12000)
Additional tax revenue	118000
Annual incremental benefit	$129000

Internal rate of return

Annuity discount factor associated with the internal rate of return=Initial cost of investment / Annual incremental benefit = 506067/129000 = 3.923

Find 3.923 in the 10-year row of present value of annuity factor. It falls in the 22% column, so the internal rate of return on the runway project is 22%.