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	$	69,000
Cost of runway construction		230,000
Cost of extending perimeter fence		16,967
Cost of runway lights		36,000
Annual cost of maintaining new runway		18,000
Annual incremental revenue from landing fees		35,000

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 $140,000. The old snowplow could be sold now for $13,500. The new, larger plow will cost $10,000 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 $92,000 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.

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

	Annual incremental benefit $0 Annuity discount factor Present value of annual benefits Initial costs: Net present value $0

2. Should the County Board of Representatives approve the runway considering NPV?(Yes or No)

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

(Select which of the following statements (is) are true by selecting an "X".)

	Cost of acquiring land Annual cost of maintaining new runway Annual incremental revenue from landing fees Cost of new snow plow Cost of runway lights Annual additional tax revenue Salvage value of old snow plow

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

(Select which of the following statements (is) are true by selecting an "X".)

	Annual additional tax revenue Annual cost of maintaining new runway Cost of acquiring land Annual incremental revenue from landing fees Cost of runway lights Salvage value of old snow plow Cost of new snow plow

Answer 1

Net-present-value analysis of the proposed long runway. (Rounded "Annuity discount factor" to 3 decimal places)

Annual Incremental Revenue from Landing Fee	$35,000
Annual additonal Tax revenue	$92,000
Less: Annual costs
Annual cost of maintaining new runway	$18,000
Annual Operating cost of larger plow	$10,000
Total Annual Additional Costs	$28,000
Annual Incremental Benefit	$99,000
Annuity Discount Factor	4.494
Present Value of Annual Benefits	$444,906
Initial Costs
Cost of acquiring additional land for runway	$69,000
Cost of runway construction	$230,000
Cost of extending perimeter fence	$16,967
Cost of Runway Lights	$36,000
Cost of New Snow Plow	$140,000
Less: Salvage value of old snow plow	-$13,500
Total Initial Costs	$478,467
Net Present Value (Present Value of Annual Benefits - Total Initial Costs	-$33,561

Hence, NPV = -$33,561

2. Should the County Board of Representatives approve the runway considering NPV? No

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

MOST UNCERTAIN		RANKING
Cost of acquiring land
Annual cost of maintaining new runway	X	3
Annual incremental revenue from landing fees	X	2
Cost of new snow plow
Cost of runway lights
Annual additional tax revenue	X	1
Salvage value of old snow plow

4. Which of the data used in the analysis are likely to be least uncertain?

LEAST UNCERTAIN
Annual additional tax revenue
Annual cost of maintaining new runway
Cost of acquiring land	X
Annual incremental revenue from landing fees
Cost of runway lights	X
Salvage value of old snow plow	X
Cost of new snow plow	X