The previous government of Gironia, a developed country, invested 100 million three years ago to build...

 

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The previous government of Gironia, a developed country, invested £100 million three years ago to build a regional airport. The airport is now ready. Over the next thirty years that it will be operational, it is expected to generate £100 million of revenues and £25 million of operating costs (including depreciation for the assets, the cost of financing the project, etc). The current government is reconsidering the project and has found a new location for the airport. The new airport would yield £300 million of revenues, £50 million of operating costs, and it would also cost £100 million to build. If the old airport is abandoned it would have £0 value to the government. a. Calculate the accounting profit of the new airport. (5 points) b. Calculate the economic profit of the new location. Should the government go ahead with the new project and why/why not? (10 points) c. Suppose that if the government goes ahead with the new airport project, then, after it is approved by the administration and the construction starts, the handling company claims that building costs have increased from £100 million to £200 million. Assuming that the old airport is scrapped, should the project still go ahead at this stage? What could the government have done to protect itself from this hold-up? (15 points) The previous government of Gironia, a developed country, invested £100 million three years ago to build a regional airport. The airport is now ready. Over the next thirty years that it will be operational, it is expected to generate £100 million of revenues and £25 million of operating costs (including depreciation for the assets, the cost of financing the project, etc). The current government is reconsidering the project and has found a new location for the airport. The new airport would yield £300 million of revenues, £50 million of operating costs, and it would also cost £100 million to build. If the old airport is abandoned it would have £0 value to the government. a. Calculate the accounting profit of the new airport. (5 points) b. Calculate the economic profit of the new location. Should the government go ahead with the new project and why/why not? (10 points) c. Suppose that if the government goes ahead with the new airport project, then, after it is approved by the administration and the construction starts, the handling company claims that building costs have increased from £100 million to £200 million. Assuming that the old airport is scrapped, should the project still go ahead at this stage? What could the government have done to protect itself from this hold-up? (15 points)

Answer rating: 100% (QA)

a Accounting profit of new airport is 15000 Accounting Profit of new airport Build Cost 100 Revenue ... View the full answer