Washington County’s Board of Representatives is considering the construction of

Question

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 $100,000. The old snowplow could be sold now for $10,000. The new, larger plow will cost $12,000 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 $64,000 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 12 percent.

  

Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required:

Prepare a net-present-value analysis of the proposed long runway.

Cost of acquiring additional land for runway $ 70,000 Cost of runway construction 200,000 Cost of extending perimeter fence 29,840 Cost of runway lights 39,600 Annual cost of maintaining new runway 28,000 Annual incremental revenue from landing fees 40,000 Required information 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.) 0 Annual incremental benefit Annuity discount factor Present value of annual benefits initial costs Net present value

Explanation / Answer

Solution:-

Calculation of Net Present Value Analysis Annual Incremental Revenue from Landing Fees 40000 Annual Incremental Revenue from Additional Tax Revenue 64000 Annual Incremental Benefit 104000 Annuity Discount Factor 5.65 Present Value of Annual Benefits 587600 Intial Costs Additional Land for Runway 70000 Runway Construction Costs 200000 Extending Permeter Fence 29840 Runway Lights 39600 New Snowplow Cost 100000 Annual Maintainece Cost for Runway 158200 (28000*5.650) Additional Operating Costs for New Snowplow 67800 (12000*5.650) Less:- Proceeds from Sale of Old Snowplow -10000 Present Value of Outflow 655440 Net Present Value -67840

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