Question

Required Informetion (The following information apples 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 acquiring additional land for runway Cost of ruway construction Cost of extending perimeter fence cost of runway 1ights Annual cost of maintaining new runway Annual incremental revenue from landins fees 85,see 29e,eae 47-60e 62,58e 15,43 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 $190,0o0. The old snowplow coutd be sold now for $19,000. The new, larger plow will cost $17.500 more in ōnnua' 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 increฏิsed economic activity will result In S114.000 per year in additional tax revenue for the county In analyzing the runwoy proposal, the boord has decided to use a 10-yeaor time horizon. The county's hurdle rate for copital projects is 19 percent. Use ARpendix A for your reference (Use appropriate factor(s) from the tebles provided.) Required: 1. Compute the initial cost of the investment in the long runway. 2. Compute the onnual net cost or beneit from the runway 3.a. Determine the IRR on the proposed long runway. (R。und your 6nswer to the nearest whole percent.) 3-b. Should It be built considering IRR? Complete this question by entering your answers in the tabs below. Rea 2 Rea 35 Compute the initial cost of the investment in the long runway Compute the annual net cost or benefit from the runway. Determine the IRR on the proposed long runway. (Round your answer to the nearest whole percent.) Should it be built considering IRR? Yes

Answer 1

1)

Initial cost of investment in a longer runway:
Land acquisition	$    (85,500.00)
Runway construction	$ (290,000.00)
Extension of perimeter fence	$    (15,437.00)
Runway lights	$    (47,000.00)
New snow plow	$ (190,000.00)
Salvage value of old snow plow	$      19,000.00
Initial cost of investment	$ (608,937.00)

2)

Annual net incremental benefit from runway:
Runway maintenance	$    (23,500.00)
Incremental revenue from landing fees	$      62,500.00
Incremental operating costs for new snow plow	$    (17,500.00)
Additional tax revenue	$    114,000.00
Annual incremental benefit	$    135,500.00

3)

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

=608,937/135,500 =4.494

Find 4.494 in the 10-year row of Table IV of Appendix A. It falls in the 18 percent column, so the internal rate of return on the runway project is 18 percent.

No it should not consider to built considering IRR as IRR of 18% is lower than the hurdle rate of 19%.