Refer to the data given in Problem 21.37.

Required:

1 Prepare a net present value analysis of the proposed long runway.

2 Should the runway be approved?

3 Which of the data used in the analysis are likely to be:

(a) Most uncertain?

(b) Least uncertain? Why?

Data from Problem 21.37

The chief executive of Bankstown Airport is considering approaching the Federal Airport Authority to request permission to construct a new longer runway at the airport. Currently, the airport can handle only private aircraft and small jet commuters. A new, long runway would enable the airport to handle the midsized jets used on many budget domestic flights. Data pertinent to the decision are as follows:

Cost of acquiring additional land for runway .......................$70 000

Cost of runway construction ..........................................200 000

Cost of extending perimeter fence .................................... 29 840

Cost of runway lights ................................................... 39 600

Annual cost of maintaining new runway ............................. 28 000

Annual incremental revenue from landing fees .....................104 000

In addition to the data given above, two other facts are relevant to the decision. First, a longer runway will require a new rolling machine, which will cost $100 000. The old roller can be sold now for $10 000. The new, larger roller will cost an additional $12 000 in annual operating cost. Second, the chief executive believes that the proposed long runway will ease the pressure on facilities at Sydney Airport, and increase the total level of aircraft activity, particularly leisure aircraft.

In analysing the runway proposal, the chief executive has decided to use a 10 year time horizon. The hurdle rate for capital expenditure projects is 12 percent.