Option 1:

Option one, is to expand the current terminal structure to meet the airports future expectations. If this option is chosen the aircraft apron area needs to be expanded as well as the parking area which the airport has located near this terminal. This option is expected to cover a time span of three years, from the start of the initial design phase till the end of the actual construction. If this option is undertaken the airport authority expects to recognize a 5.5% annual increase in passenger traffic. The terminal currently handles roughly 300,000 passengers a year. The airport currently receives $7 per passenger.

Expected Budget for Option 1

1. Renovation of Terminal Building 8,000,000

2. Extension of aircraft apron area 1,500,000

3. Expansion of parking area 950,000

With the modernization and expansion of the terminal, the airport authority expects that the operating and maintenance costs associated with this terminal will also increase. In addition, the fees associated with the apron and parking areas will most likely increase as well.

Estimated Operating and Maintenance Increases for Option 1

1. Terminal Building 55,000

2. Apron Area 10,000

3. Parking Area 5,000

The airport authority decided that these projects will have a useful economic life of 20 years with a salvage value of 0. The airports current discount rate is 6%, determine the values of all three options and decide which one the airport should pursue. Assume it is 2019 and expenses will start to incur for these projects in year 2020.

Determine the NPV and the IRR?