Question

2 Requiredi (The following information applies to the questions displayed belowj Washington County's Board of Representatives is considering the construction of a longer runway at the county airport Currently, the airport can h airport to handle the midsize jets used on many domestic flights. Data pertinent to the board's decision appear below Part 2 of 2 only private aircraft and small commuter jets. A new, long runway would enable the 10 points Cost of runway construction 238,000 16,967 36,000 18,e00 35,e00 Cost of runway lights Annual cost of maintaining new ruway 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 board projects that the increased economic activity will result in $92,000 per year in additional tax revenue for the county s 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.) 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. The County Board of Representatives belleves that if the county conducts a promotional effort costing $23,000 per year the proposed long runway will result in substantially greater economic development than was projected originally. However, the board is uncertain about the actual increase in county tax revenue that will result. Suppose the board builds the long runway and conducts the promotional campaign. What would the increase in the county's annual tax revenue need to be in order for the proposed runway's internal rate of return to equal the county's hurdle rate of 18 percent? (Round intermediate and final answer to the nearest dollar amount.)

Answer 1

1)
	Additional tax revenue	92000
	Incremental operating costs for new snow plow	-10000
	Incremental revenue from landing fees	35000
	Runway maintenance	-18000
	Annual incremental benefit	99000
	Annuity discount factor	4.4941
	Present value of annual benefits	444916
	Initial costs:
	Less: Runway construction	-230000
	Less: Runway lights	-36000
	Less: New snow plow	-140000
	Add: Salvage value of old snow plow	13500
	Less: Extension of perimeter fence	-16967
	Less: Land acquisition	-69000
	Net present value	-33551
	No, the County Board of Representatives should not approve
	the runway as the NPV is negative.
2)	But, if as suggested by the Board of Representatives, it is
	decided to incur the additional promotional effort costing $23000
	per year, the additional revenue required to make the project
	viable, then the NPV should be atleast 0.
	Revised annual incremental benefit (without additional revenue) = 99000-23000 =	76000
	PV of revised annual incremental benefit [76000*4.4941)	341552
	NPV (without additional revenue)	-136915
	For 0 NPV, the PV of the additional revenue should be 136915
	For that the additional tax revenue should be atleast 136915/4.4941 =	30465
	REQUIRED INCREASE IN TAX REVNUE = $30465