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.

Cost of acquiring additional land for runway	$	78,000
Cost of runway construction		265,000
Cost of extending perimeter fence		50,270
Cost of runway lights		42,000
Annual cost of maintaining new runway		21,000
Annual incremental revenue from landing fees		50,000

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 $165,000. The old snowplow could be sold now for $16,500. The new, larger plow will cost $14,000 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 $72,000 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 11 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.

Answer 1

Net present value analysis:			(PVIAF @ 11% for 10 years=5.8892)
						$
Initial year costs and revenues: (No need to apply present value)
Cost of acquiring additional land for runway						-78000
Cost of runway construction						-265000
Cost of extending perimeter fence						-50270
Cost of runway lights						-42000
Cost of new snow plow						-165000
revenue from sale of old snow plow						16500
Subsequent year revenues and costs:(Apply present value)
Annual cost of maintaining new runway				(21000*5.8892)		-123673
Annual incremental revenue from landing fees					(50000*5.8892)	294460
Incremental operating cost due to new snow plow					(14000*5.8892)	-82449
Additional tax revenue for the country					(72000*5.8892)	424022
Net present value						-71410
Net present value is negative. It is better to avoid this project