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	$	64,500
Cost of runway construction		280,000
Cost of extending perimeter fence		24,535
Cost of runway lights		33,000
Annual cost of maintaining new runway		16,500
Annual incremental revenue from landing fees		27,500

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 $120,000. The old snowplow could be sold now for $12,000. The new, larger plow will cost $8,000 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 $80,000 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 14 percent.

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

Required:

1. Compute the initial cost of the investment in the long runway.

2. Compute the annual net cost or benefit from the runway.

3-a. Determine the IRR on the proposed long runway. (Round your answer to the nearest whole percent.)

3-b. Should it be built considering IRR?

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 14 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 14 percent? (Round intermediate and final answer to the nearest dollar amount.)

I send you the entire question but only the last part I need help with. I got all the other parts correct ,but you need to see everthing to follow . Please show clear detail working. What would be the increase in the county annual revenue need to be be in order for the proposed runway's internal rate of return to equal to the hurdle rate of 14%?

Answer 1

1	Computation of Initial Cost of investment in the long runaway
	Detail		Amount
	Cost of acquiring land for runaway		$64,500.00
	Cost of runaway Construction		$280,000.00
	Cost of estended perimeter fence		$24,535.00
	Cost of runway light		$33,000.00
	Cost of New snowplow		$120,000.00
	Revorable value of old snow plow		-$12,000.00
	Initial cost of investment		$510,035.00
2	Computation of annual net cost & benfit from runaway
	Annual Benefit
	Annual incremental revenue from landing fees		$27,500.00
	Annual increase din econmic activity by additional tax		$80,000.00
	Annual Cost
	Annual cost of maintiaining new runaway		$16,500.00
	Large plow annual operating cost		$8,000.00
	Net benefit		$83,000.00
3A	Computation IRR
	Payback period	=	Initial Cash outflow/ Annual CashInflow
		=	510035/83000
		=	6.145
	Present value annuity factor in 10 year @ 14%	=	5.22
	Present value annuity factor in 10 year @ 13%		6.145
	Hence IRR will be 13%
3b	Cost of Hurdle rate for capital project is 14% however IRR is 13% , Hence the project under consideration should not be accepted.