Question
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
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 | $ | 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, two other facts are relevant to the decision. First, 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. 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 $64,000 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. The County Board of Representatives believes that if the county conducts a promotional effort costing $20,000 per year, the proposed long runway will result in substantially greater economic development than was projected originally. However, the board is uncertain about the actual increase in county tax revenue that will result.
Suppose the board builds the long runway and conducts the promotional campaign. What would the increase in the countys annual tax revenue need to be in order for the proposed runways internal rate of return to equal the countys hurdle rate of 12 percent? (Round your final answers to the nearest dollar.)
Required increase in tax revenue: ____________
[Appendix A]
Future Value and Present Value Tables Table I 1.651 2.144 .100 11 206 21 75 45360 1161 Table II 2.100 2120 Table III 1 + n 14.577 .340 26e 206 .160 .1.039 CO'8 .002 .040 .089 .082 25 40208.046 . 2 011.006 ton .001 co! Table IV 2 1.888 1f03 1.7 17: 1.680 1.647 15 11.520 1A92 167 1.440 1A24 1 1.M1 4 3Al5 a312 31,0 a(G 2914 2198 2w zseg 2A94 2404 2362 2320 2241 2100 5 4452 212 3 36 3433 3274 3127 280 20 275 28 2R5 2Se 24 2485 2 8 6733 6210 GT47 G408 4,630 4344 4078 3.537 3.013 3421 a329 3241 a076 200, 4031 3. 38 3.1 4035 3 12 85-8.384 7. G814 0.104 5.000 0.197 47Ba 4439 4.127 31 a725 3005 3387 a190 3550 18530 11 3a42 a
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