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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.

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 $115,000. The old snowplow could be sold now for $11,500. The new, larger plow will cost $7,000 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 $76,000 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 10 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?

Prepare a net-present-value analysis of the proposed long runway. (Round your "Annuity discount factor" to 3 decimal places. Negative amounts should be indicated by a minus sign.)

Cost of acquiring additional land for runway $ 63,000 Cost of runway construction 305,000 Cost of extending perimeter fence 19,880 Cost of runway lights 32,000 Annual cost of maintaining new runway 16,000 Annual incremental revenue from landing fees 25,000

Explanation / Answer

1) Additional tax revenue 76000 Incremental operating costs for new snow plow -7000 Incremental revenue from landing fees 25000 Runway maintenance -16000 Annual incremental benefit 78000 Annuity discount factor 6.145 Present value of annual benefits 479310 Initial costs: Less: Runway construction -305000 Less: Runway lights -32000 Less: New snow plow -115000 Add: Salvage value of old snow plow 11500 Less: Extension of perimeter fence -19880 Less: Land acquisition -63000 Net present value -44070 2) No, the County Board of Representatives should not approve the runway as the NPV is negative. 3-a) Cost of land is unassessable unless there is already a deal in place. All other items are less uncertain as they can be predicted with reasonable accuracy from the exisiting figures for costs and revenues. 3-b) The following items are least uncertain: Annual additional tax revenue Annual cost of maintaining new runway Annual incremental revenue from landing fees The above items can be reasonably estimated from the existing operating data.

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