Washington County’s Board of Representatives is considering the construction of
ID: 341964 • Letter: W
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.
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_________________
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 67,500Explanation / Answer
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) 163577Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.