Washington County’s Board of Representatives is considering theconstruction of a longer runway at the county airport. Currently,the airport can handle only private aircraft and small commuterjets. A new, long runway would enable the airport to handle themidsize jets used on many domestic flights. Data pertinent to theboard’s decision appear below.
| |
| Cost of acquiring additional land for runway | $ | 78,000 | |
| Cost of runway construction | | 265,000 | |
| Cost of extending perimeter fence | | 50,270 | |
| Cost of runway lights | | 42,000 | |
| Annual cost of maintaining new runway | | 21,000 | |
| Annual incremental revenue from landing fees | | 50,000 | |
|
In addition to the preceding data, two other facts are relevantto the decision. First, a longer runway will require a newsnowplow, which will cost $165,000. The old snowplow could be soldnow for $16,500. The new, larger plow will cost $14,000 more inannual operating costs. Second, the County Board of Representativesbelieves that the proposed long runway, and the major jet serviceit will bring to the county, will increase economic activity in thecommunity. The board projects that the increased economic activitywill result in $72,000 per year in additional tax revenue for thecounty.
In analyzing the runway proposal, the board has decided to use a10-year time horizon. The county’s hurdle rate for capital projectsis 11 percent.
Use Appendix A for your reference. (Use appropriatefactor(s) from the tables provided.)
Required:
1. Prepare a net-present-value analysis of theproposed long runway.
