Burlington Board of Representatives is considering the construction of a longer runway at the city 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 on many domestic flights. Data pertinent to the boards decision appear below:

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 $40,000

In addition to the preceding data, other facts are relevant to the decision:

A longer runway will require a new snowplow, which will cost $100,000. The old snowplow could be sold now for $10,000. The new, larger plow will cost $12,000 more in annual operating costs.

Burlington Board of Representatives believes that the proposed long runway, and the major jet service it will bring to the city, will increase economic activity in the community. The board projects that the increased economic activity will result in $64,000 per year in additional tax revenue for the city.

In analyzing the runway proposal, the board has decided to use a 10-year time horizon. The countys required rate of return (RRR) for capital projects is 12 percent.

1. Compute the initial cost of the investment in the long runway.
2. Compute the annual net cost or benefit from the runway.
3. Prepare a net-present-value analysis of the proposed long runway. You must provide all the supporting calculations using the Present Value of Annuity Tab
4. Do you estimate that the IRR of the proposed long runway is higher or lower than the required rate of return (RRR).
5. Which of the data used in the analysis are likely to be the most uncertain? Least uncertain? Why?
6. Should the City Board of Representatives approve the runway? Support your recommendation by providing quantitative and qualitative justifications.