1 answer

Required information [The following information applies to the questions displayed below.] Washin...

Question:

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 flights. Data pertinent to the board’s decision appear below.

Cost of acquiring additional land for runway $ 88,500
Cost of runway construction 300,000
Cost of extending perimeter fence 10,180
Cost of runway lights 49,000
Annual cost of maintaining new runway 24,500
Annual incremental revenue from landing fees 67,500

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 $200,000. The old snowplow could be sold now for $20,000. The new, larger plow will cost $19,000 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 $136,000 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 25 percent.

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

Required:

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

  2. 2. Should the County Board of Representatives approve the runway considering NPV?

  3. 3-a. Which of the data used in the analysis are likely to be most uncertain?

  4. 3-b. Which of the data used in the analysis are likely to be least uncertain

Additional tax revenueselected answer correct not attempted
Incremental operating costs for new snow plowselected answer correct not attempted
Incremental revenue from landing feesselected answer correct not attempted
Runway maintenanceselected answer correct not attempted
Annual incremental benefit $0
Annuity discount factor not attempted
Present value of annual benefits
Initial costs:
Less: Extension of perimeter fenceselected answer correct not attempted
Less: Land acquisitionselected answer correct not attempted
Less: New snow plowselected answer correct not attempted
Add: Land acquisitionselected answer incorrect not attempted
Less: Runway constructionselected answer correct not attempted
Less: Runway lightsselected answer correct not attempted
Net present value $0

Answers

Part 1

Runway maintenance (24500)
Incremental revenue from landing fees 67500
Incremental operating costs for snow plow (19000)
Additional tax revenue 136900
Annual incremental benefit 160900
Annuity discount factor 3.571
Present value of annual benefits 574574
Initial costs:
Less: land acquisition (88500)
Less: Runway construction (300000)
Less: extension of perimeter fence (10180)
Less: Runway lights (49000)
Less: new snow plow (200000)
Add: salvage value of old snow plow 20000
Net present value (53106)

Part 2

No project should not be selected

Part 3a

Annual cost of maintaining new runway

Annual incremental revenue from landing fees

Annual additional tax revenue

Part 3b

Cost of acquiring lands

Cost of Runway lights

Cost of new snow plow

Salvage value of old snow plow

.

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