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. $ 67,500 260,000 10,804 35,000 17,500 32,500 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 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

1.

Compute the initial cost as follows:

	Amount
Cost of acquiring additional land for runway	$67,500
+ Cost of runway construction	$260,000
+ Cost of extending perimeter fence	$10,804
+ Cost of runway lights	$35,000
+ Cost of new snowplow	$130,000
- Sale of old snowplow	($13,000)
New initial outlay for long runway	$490,304

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2.

Compute the annual net cost or benefit from the runway as follows:

	Amount
Annual incremental revenue from landing fees	$32,500
Add: Additional tax revenue for the county	$88,000
Less: Annual cost of maintaining new runway	($17,500)
Less: Extra annual operating cost of new plow	($9,000)
Annual benefit of the runway	$94,000

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3.

Compute IRR of the project as follows using the spreadsheet as follows:

C 20 | 21 22 A Year 0 1 2 Initial cost outlay of runway Annual benefit of the runway 26 ($490,304) | $94,000 $94,000 $94,000 $94,000 $94.000 $94.000 $94.000 $94.000 $94.000 $94.000 14% 4 5 6 7 8 9 10 28 29 30 31 32 33 IRR

Working as follows:

B C | 21 Initial cost outlay of runway Annual benefit of the runway A Year 0 1 2 3 4 5 6 ($490,304) $94,000 $94.000 $94,000 $94,000 $94,000 $94.000 $94.000 $94.000 $94,000 $94,000 =IRR(C22:C32) 32 9 10 IRR