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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.)

Required:

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

2. Should the County Board of Representatives approve the runway considering NPV?

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

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

Prepare a net-present-value analysis of the proposed long runway. (Round your "Annuity discount factor" to 3 decimal places. Negative amounts should be indicated by a minus sign.)

Additional tax revenue Incremental operating costs for new snow plow Incremental revenue from landing fees Runway maintenance Annual incremental benefit $0 Annuity discount factor Present value of annual benefits Initial costs: Less: Runway construction Less: Runway lights Less: New snow plow Add: Salvage value of old snow plow Less: Extension of perimeter fence Less: Land acquisition Net present value $0

Answer 1

1)
	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
2)	No, the County Board of Representatives should not approve
	the runway as the NPV is negative.
3-a)	Cost of land is unassessable unless there is already a deal in place.
	All other items are less uncertain as they can be predicted with reasonable accuracy from the exisiting figures for costs and revenues.
3-b)	The following items are least uncertain:
	Annual additional tax revenue
	Annual cost of maintaining new runway
	Annual incremental revenue from landing fees
	The above items can be reasonably estimated from the existing operating data.