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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	$	63,000
Cost of runway construction		305,000
Cost of extending perimeter fence		19,880
Cost of runway lights		32,000
Annual cost of maintaining new runway		16,000
Annual incremental revenue from landing fees		25,000

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 $115,000. The old snowplow could be sold now for $11,500. The new, larger plow will cost $7,000 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 $76,000 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 10 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 10 percent. The County Board of Representatives believes that if the county conducts a promotional effort costing $30,500 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 10 percent? (Round intermediate and final answer to the nearest dollar amount.)

	Required increase in tax revenue

Answer 1

1)	The runway proposal is analyzed as below:
	Additional tax revenue	76000
	Incremental operating costs for new snow plow	-7000
	Incremental revenue from landing fees	25000
	Runway maintenance	-16000
	Annual incremental benefit	78000
	Annuity discount factor	6.145
	Present value of annual benefits	479310
	Initial costs:
	Less: Runway construction	-305000
	Less: Runway lights	-32000
	Less: New snow plow	-115000
	Add: Salvage value of old snow plow	11500
	Less: Extension of perimeter fence	-19880
	Less: Land acquisition	-63000
	Net present value	-44070
	AS the NPV is negative the proposal if not recommendable as such.
2)	But, if as suggested by the Board of Representatives, it is
	decided to incur the additional promotional effort costing $30500
	per year, the additional revenue required to make the project
	viable, then the NPV should be atleast 0.
	For 0 NPV, the PV of the additional revenue should be 44070.
	For that the additional tax revenue should be atleast 44070/6.145 =		$          7,172
	REQUIRED INCREASE IN TAX REVNUE = $7172.