Question
Section 3: Capital Expenditure and Sustainability 19 marks Fast Travel Airport is proposing a $1 billion expansion of its airport located in a city named
Section 3: Capital Expenditure and Sustainability 19 marks
Fast Travel Airportis proposing a $1 billion expansion of its airport located in a city namedSeol. The expansion will double current flight capacity, increasing international and domestic travel to this popular tourist destination. The expansion requires acquisition of the land of a neighbouring golf course. The acquisition has not progressed smoothly andFast Travel Airport is currently facing a lawsuit for allegedly acquiring the land illegally. Additionally, environmental activists have voiced concerns that this expansion goes against addressing the climate emergency, as more flights would lead to higher levels of carbon emissions emitted into the atmosphere.
Information about the proposed project is as follows:
- Required initial investment include land acquisition ($220 million), additional planes ($480 million), runway construction ($130 million), and additional machines and equipment ($170 million).
- There will be additional operating expenditure of $20 million per year.
- Incremental revenue of $180 million per year is expected.
- Depreciation is projected to increase by $25 million per year due to additional investment in long-term assets.
- The additional long-term assets acquired for this proposal will require major maintenance at the end of every 10 years, which is expected to cost a total of $30 million each time the maintenance is performed.
Fast Travel Airportrequires a rate of return of 10%. Assume a time horizon of 20 years. Ignore tax implications.
Required:
- Compute the net present value for the investment proposal. (Present value tables are available on the next page). (12 marks)
- Describe the five tiers of environmental costs and provide an example of each for Fast Travel Airport(Five sentences that covers the main points are sufficient).
(7 marks)
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