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.)

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.)

1. what is the require increase in tax revenue in $

Answer 1

a.       Compute the net initial total outlay for the long runway.
Cost of acquiring land	64500
Cost of runway construction	280000
Cost of extending perimeter fence	24535
Cost of runway lights	33000
Cost of new snow plow	120000
Less:Sub: Sale of old snowplow	-12000
Net initial outlay for the long runway	510035
b.      Compute the annual net cost or benefit of the runway.
Add: Annual incremental revenue from landing fees:	27500
Add: Additional tax revenue for the county	80000
Sub: Annual cost of maintaining new runway:	-16500
Sub: Extra annual operating costs of new plow	-8000
Annual benefit of the runway	83000
c.       Prepare a net present value analysis of the proposed new long runway.
Net initial outlay for the long runway	510035
Annual benefit of the runway	83000
Horizon timeline for project	10
County hurdle rate for capital projects	14%
Net present value	-77097.4
IRR	10.00%

Year	Cash flow	Pv @14%	CF*PVF
0	-510035	1	-510035
1	83000	0.877193	72807.02
2	83000	0.769468	63865.8
3	83000	0.674972	56022.64
4	83000	0.59208	49142.66
5	83000	0.519369	43107.6
6	83000	0.455587	37813.68
7	83000	0.399637	33169.9
8	83000	0.350559	29096.4
9	83000	0.307508	25523.16
10	83000	0.269744	22388.74
		NPV=	-77097.4
	=IRR(O41:O51)
	10.00%

As NPV is negative project should not be accepted.