Orlando International Airport plans to extend passenger capacity of its existing

Question

Orlando International Airport plans to extend passenger capacity of its existing terminal to accommodate its forecasted growth. A new terminal would be needed once the state's busiest airport reached 40 million passengers annually. Based on current growth rates, Orlando International should reach the 40 million mark 11 years from now. The expansion cost is expected to be $400 million. The airport service areas will also need attention. These include passenger security checkpoints, ticketing lines, entering/exiting weaves, terminal ramps, baggage claim, and baggage handling. Improvements in these areas will cost an additional $240 million. How much does the airport need to set aside now to pay for these costs, if the company can earn 10% per year, compounded every 4 months.

Explanation / Answer

A new terminal would be needed once the state's busiest airport reached 40 million passengers annually.

11 year time

expansion cost is expected to be $400 million

Improvements in these areas will cost an additional $240 million

r=10% per year, compounded every 4 months

let P be the value airport need to set aside now to pay for these costs

then

total cost in 11 yrs = 640 million

so

FV= PV*(1+r/3)^3*n

640=P*(1+0.1/3)^33

P= 216.89 million

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