[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.)
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
| 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 |