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 $ 82,500 Cost of runway construction 280,000 Cost of extending perimeter fence 19,908 Cost of runway lights 45,000 Annual cost of maintaining new runway 22,500 Annual incremental revenue from landing fees 57,500 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 $180,000. The old snowplow could be sold now for $18,000. The new, larger plow will cost $16,000 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 $94,000 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 18 percent. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) 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 18 percent. The County Board of Representatives believes that if the county conducts a promotional effort costing $28,000 per year, the proposed long runway will result in substantially greater economic development than was projected originally. However, the board is uncertain about the actual increase in county tax revenue that will result. Required: Suppose the board builds the long runway and conducts the promotional campaign. What would the increase in the county’s annual tax revenue need to be in order for the proposed runway’s internal rate of return to equal the county’s hurdle rate of 18 percent? (Round intermediate and final answer to the nearest dollar amount.)

Answer 1

Dear student, Use Present value factor from your table, otherwise, it might be possible Minor difference in solution due to rounding of PV factor.

Year	Discount Factor @ 18%
1	0.84746
2	0.71818
3	0.60863
4	0.51579
5	0.43711
6	0.37043
7	0.31393
8	0.26604
9	0.22546
10	0.19106
Total	4.49409

Net Investment for the long runway
	Cost of acquiring additional land for runway	$            82,500
Add:	Cost of runway construction	$          280,000
Add:	Cost of extending perimeter fence	$            19,908
Add:	Cost of runway lights	$            45,000
Add:	Cost of new snowplow	$          180,000
Less:	Sale of old snowplow	$          (18,000)
	Net Investment for the long runway	$          589,408
Annual net benefit of the runway
	Annual incremental revenue from landing fees	$            57,500
Add:	Additional tax revenue for the county	$            94,000
Less:	Annual cost of maintaining new runway	$          (22,500)
Less:	Extra annual operating costs of new plow	$          (16,000)
Less:	Promotional Expense	$          (28,000)
	Annual net benefit of the runway	$            85,000
Increase in the county’s annual tax revenue needed
	Present Value of benefits (85000*4.49409)	$          381,998
Less:	Net Investment for the long runway	$          589,408
	Net Present Value	$       (207,410)
Net Present Value is negative so the company needs some additional tax revenue in order to proposed runway’s internal rate of return to equal the county’s hurdle rate of 18 percent.
				Increase in the county’s annual tax revenue needed (207410/4.49409)	$            46,152
			Increase in the county’s annual tax revenue needs to be in order for the proposed runway’s internal rate of return to equal the county’s hurdle rate of 18 percent		$            46,152