Question 5 Required information [The following information applies to the questi

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Question 5
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[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 $ 60,000 Cost of runway construction 305,000 Cost of extending perimeter fence 53,937 Cost of runway lights 30,000 Annual cost of maintaining new runway 15,000 Annual incremental revenue from landing fees 20,000 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 $105,000. The old snowplow could be sold now for $10,500. The new, larger plow will cost $6,000 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 $68,000 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 7 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?
1.Initial cost of the investment 2. Compute the annual net cost or benefit from the runway 3. Determine the IRR on the proposed long runway 4. Should it be built considering IRR? Future Value and Present Value Tables Table IV

Explanation / Answer

Cost of acquiring additional land for runway

Cost of runway construction

Cost of extending perimeter fence

Cost of runway lights

1) Initial investment

Cost of acquiring additional land for runway

60000

Cost of runway construction

305000

Cost of extending perimeter fence

53937

Cost of runway lights

30000 Cost of new snowplow 105000 Less: Selling price of old snowplow 10500 Total initial investment 543437 2) Annual net benefit Annual incremental revenue from landing fees 20000 Less: Annual cost of maintaning runway 15000 Less: Snowplow maintainance 6000 Add: Additional tax revenue 68000 Net annual benefit 67000 3) Cash Flow Year 0 1 2 3 4 5 6 7 8 9 10 Net annual benefit 67000 67000 67000 67000 67000 67000 67000 67000 67000 67000 Initial investment 543437 Net Cash Flow -543437 67000 67000 67000 67000 67000 67000 67000 67000 67000 67000 IRR 4.00% Since the IRR is less than hurdle rate of 7%, the project should not be undertaken

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