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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	$	75,000
Cost of runway construction		355,000
Cost of extending perimeter fence		23,158
Cost of runway lights		40,000
Annual cost of maintaining new runway		20,000
Annual incremental revenue from landing fees		45,000

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 $155,000. The old snowplow could be sold now for $15,500. The new, larger plow will cost $13,000 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 $66,000 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 6 percent.

Required:

1. 1. Compute the initial cost of the investment in the long runway.

2. 2. Compute the annual net cost or benefit from the runway.

3. 3-a. Determine the IRR on the proposed long runway. (Round your answer to the nearest whole percent.)

4. 3-b. Should it be built considering IRR?

5. 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 6 percent. The County Board of Representatives believes that if the county conducts a promotional effort costing $35,500 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.

   Required:

   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 6 percent? (Round intermediate and final answer to the nearest dollar amount.)

   

   Future Value and Present Value Tables able I uo$1.01 125 1.191 1 301 1.464 1.406 1.482 1.728 1.30 1.762 2488 1712 2.196 1.584 2 360 2 594 24/6 2.773 3106 1.423 5.160 1.79 2332 1.732 2 201 20 2181 200 6720 able II 1.00 Ch lows 1000 1000 100) 2.100 4779 7330 T 716 13 580 960 12 21 35 21015 23276 15 20024 271 31773 37 260 56790 1,10100 15026 154.782 瀲057 嵘507 767000 1,342000 7,34ag00 9058 1132 149 241.330 Table III PresentVelue of $1.00 .731傥7 540眉ア "201 .305 .206 210 201 .170 157 ,S39 123 100 13 .001 A09崩290 229 .182 .s45 .116 093 ,001 000 040、 027 Table IV 1.00 Cash Faws Period 4%6%8%10% 12% 14% 169% 14% 20% 22% 24% 2ต. 攜 3 2T75 2573 2577 24E7 2A 2 2322 2245 2.174 2.100 2042 1.981 1 2 1rea 1.808 1.8 4 36) 34 6 ม12 170 3,037 2914 2730 2e90 2509 2494 2,404 2382 200 2201 2.166 3274 3 522 4917 43E5 4.11 ang 366 2496 3308 3167 3000 2961 2 2754 2643 6247 5 4.086 3 13 998 准63 7.904 7.10③ 6A24 842 342 4.910 4533 4200 3012 3790 3666 2427 3220 9818 8S1 4) 19.ΤΟ 15.0 6 11 925 779 8244 7105 62a4 5546 4.997 4564 4168 3999 3.ses a571 3.333

Answer 1

1.Initial Cost of investing = $75,000+$355,000+$23,158+$40,000+155,000-15,500

= $632,658

2.Annual net cost of benefit = $45,000 - $20,000 + $66,000 - $13,000

= $78,000 benefit

3-a IRR is the rate at which Present value of cash inflows = present value of cash outflows

Let the rate be r%

78,000*PVAF(r%, 10 years) = 632,658

PVAF(r%, 10 years) = 8.111

From present value annuity factor table, r = 4%

Hence, IRR = 4%

3-b Since the hurdle rate i.e. required rate is 6% while the project is providing 4%, the runway should not be built.