Question

Required information The following information applies to the questions displayed below] 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 runway construction 230,eee 16,967 36,000 18,000 35,000 Cost of extending perimeter fence Cost of runway lights Annual cost of mai 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 $140,000. The old snowplow could be sold now for $13,500. The new, larger plow will cost $10,000 more in annual operating costs. Second, the County Board of Representatives runway, and the major jet service it will bring to the county, will increase economic activity in the community. The boarcd projects that the increased economic activity will result in $92,000 per year in additional tax revenue for the county believes that the proposed long 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 18 percent Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1. Compute the initial cost of the investmat 2. Compute the annual net cost or benefit from the runway 3-a. Determine the IRR on the proposed long runway. (Round your answer to the nearest whole percent.) 3-b. Should it be built considering IRR? in the long runway Complete this question by entering your answers in the tabs below

Answer 1

1. Initial cost of investment in the long runway

Particulars	Amount ($)
Additional land cost	69,000
Runway Construction cost	230,000
Cost of extending perimeter fence	16,967
Cost of runway lights	36,000
Cost of new snowplough	140,000
(-) Sale value of old snowplough	(13,500)
Total initial investment required in long runway	478,467

2. Annual net cost or benefit from long runway

Particulars	Annual Amount ($)
Incremental revenue from landing fees	35,000
Additional tax revenue	92,000
(-) Maintenance cost of new runway	(18,000)
(-) Increased snowplough operating expenses	(10,000)
Total annual benefit/(cost) from long runway	99,000

3-a. IRR of long runway project over a 10-year horizon

IRR is the rate at which the present value of cash inflows and cash outflows is equal.

In this case, the PV of cash outflows = Initial investment = $478,467

Inflows = Annual benefit = $99,000 per year for 10 years

therefore, IRR is rate at which $478467 = PV of $99,000 per year for 10 years

Using trial & error method, at the rate of 15%,

PV at 15% = 99000 / (1.15)¹ + 99000 / (1.15)² + 99000 / (1.15)³​​​​​​​ + 99000 / (1.15)⁴​​​​​​​ + 99000 / (1.15)⁵ + 99000 / (1.15)⁶ + 99000 / (1.15)⁷ + 99000 / (1.15)⁸ + 99000 / (1.15)⁹ + 99000 / (1.15)¹⁰

PV at 15% = 99000 /1.15 + 99000 /1.3225 + 99000 /1.5209 + 99000 /1.7409 + 99000 /2.0114 + 99000 /2.3131 + 99000 /2.66 + 99000 /3.059 + 99000 /3.5179 + 99000 /4.0456

Therefore, PV at 15% = $496,858.09

Since PV of inflows at 15% > PV of outflows, we shall increase the discounting rate to 16%

PV at 16% = 99000 / (1.16)¹ + 99000 / (1.16)²​​​​​​​ + 99000 / (1.16)³​​​​​​​ + 99000 / (1.16)⁴​​​​​​​ + 99000 / (1.16)⁵ + 99000 / (1.16)⁶ + 99000 / (1.16)⁷ + 99000 / (1.16)⁸ + 99000 / (1.16)⁹ + 99000 / (1.16)¹⁰

PV at 16% = 99000 /1.16 + 99000 /1.3456 + 99000 /1.5609 + 99000 /1.8106 + 99000 /2.1003 + 99000 /2.4364 + 99000 /2.8262 + 99000 /3.2784 + 99000 /3.803 + 99000 /4.114

Therefore, PV at 16% = $478,489 which is almost equal to PV of outflows of $478,467

Therefore, IRR = 16%

3-b. Decision to build long runway or no

Hurdle rate for county projects = 18%

IRR of long runway project = 16%

Since, IRR < Hurdle rate, the county should not build the long runway.