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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.

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.)

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

Explanation / Answer

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.

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