Question

Washington county’s board

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 filights. Data pertinent to the board's decision appear below. 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 $ 81,000 275,000 49,875 44,000 22,000 55,000 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 $175,000. The old snowplow could be sold now for $17,500. The new, larger plow will cost $15,500 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 $90,000 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 14 percent Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1. Prepare a net-present-value analysis of the proposed long runway. 2. Should the County Board of Representatives approve the runway considering NPV? 3-a. Which of the data used in the analysis are likely to be most uncertain? 3-b. Which of the data used in the analysis are likely to be least uncertain? Complete this question by entering your answers in the tabs below.

Answer 1

Net Present Value = PV of inflows - PV of outflows

and if NPV turns out to be positive, the project is viable.

Cumulative Discounting factor @ 14% for 10 years = 5.2161

PV OF OUTFLOW :

Initial Investment = Cost of acquiring land + Cost of construction of runway + cost of extended perimeter fence + cost of runway lights + cost of new snowplow

Initial Investment = $81,000 + $275,000 + $49,875 + $44,000 +$175,000

= $624,875

Annual Outflow = Annual cost of maintaining highway = additional operation cost of snowplow

= $22,000 + $15,500

= 37,500

PV of Annual Outflows = Annual Outflow * Cumulative discounting factor

= $37,500 * 5.2161

=$195,603.75

PV of Net Outflows = Initial cost + PV of annual outflows

= $624,875 + $195,603.75

= $820,478.75

PV OF INFLOW :

Initial Inflow = Sale proceeds from old snowplow

= $17,500

Annual Incremental revenue for landing fees = $55,000

Annual additional tax revenue for country = $90,000

Annual Inflows = Increment landing revenue + additional tax revenue

   = $55,000 + $90,000

= $145,000

PV of Annual Inflows = Annual Inflow * Cumulative Discounting Factor

= $145,000 * 5.2161

= $756,334.50

PV of Inflows = Initial inflow + PV of Annual Inflows

= $17,500 + $756.334.50

= $773,834.50

NPV of project = PF of Inflows - PV of Outflows

= $773,834.50 - $820,478.75

= -$46,644.25

The Country Board of Representatives should not approve the runway considering the runway.

3 (a) : The data used in analysis that is likely to be most uncertain is the increment in the annual revenue of the country in the form of landing charges and additional tax revenues.

3 (b) : The data used in analysis that is likely to be least uncertain is the Total Initial cost for Construction of Runway.