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	$	88,500
Cost of runway construction		300,000
Cost of extending perimeter fence		10,180
Cost of runway lights		49,000
Annual cost of maintaining new runway		24,500
Annual incremental revenue from landing fees		67,500

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 $200,000. The old snowplow could be sold now for $20,000. The new, larger plow will cost $19,000 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 $136,000 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 25 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 25 percent. The County Board of Representatives believes that if the county conducts a promotional effort costing $30,000 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 25 percent? (Round intermediate and final answer to the nearest dollar amount.)

Required increased tax reveune_________________

Answer 1

the required annual increase in tax revenue to meet internal rate of return of 25% is 45820. The calculation are as below.

Pv of Cash Inflow	Amt
Annual revenue from Landing Fees	240,975
(=67500*3.57)
Additional Tax Revenue	485,520
(=136000*3.57)
Pv of Cash Inflow	726,495
Pv of Cash outflow
Cost of acquiring additional land for runway	88,500
Cost of runway construction	300,000
Cost of extending perimeter fence	10,180
Cost of runway lights	49,000
Annual cost of maintaining new runway	87,465
(24500*3.57)
New snow plow	180,000
Increase in annual operating cost	67,830
(19000*3.57)
Promotional Effort	107,100
(30000*3.57)
Pv of Cash outflow	890,075
PV of Net Cash Outflow	(163,580)
Additional annual revenue to cover negative cashflow
(=45820* 3.57)	163577