Washington Countys 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 boards decision appear below.

Cost of acquiring additional land for runway $ $79,500$

Cost of runway construction $270,000$

Cost of extending perimeter fence $19,840$

Cost of runway lights $43,000$

Annual cost of maintaining new runway $21,500$

Annual incremental revenue from landing fees $52,500$

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 $$170,000.$ The old snowplow could be sold now for $$17,000.$ The new, larger plow will cost $$15,000$ more in annual operating costs. Second, the County Board of Representatives believes that the proposed long runway, and the major jet service it will bring to the county, will increase economic activity in the community. The board projects that the increased economic activity will result in $$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 countys hurdle rate for capital projects is $12$ percent.

Use Appendix A for your reference. $($Use appropriate factor$($s$)$ from the tables provided.$)$

Problem $16-45$ Internal Rate of Return; Even Cash Flows $($Section $1)($LO $16-1,16-3)$

Required:

$1.$ Compute the initial cost of the investment in the long runway.

$2.$ Compute the annual net cost or benefit from the runway.

$3-$a$.$ Determine the IRR on the proposed long runway.

$3-$b$.$ Should it be built considering IRR?

Answer rating: 100% (QA)

Answer 1 Compute the initial cost of the investment in the long runway Initial cost of the investmen... View the full answer