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	$	100,000
Cost of runway construction		325,000
Cost of extending perimeter fence		30,640
Cost of runway lights		49,000
Annual cost of maintaining new runway		24,500
Annual incremental revenue from landing fees		67,500

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 $200,000. The old snowplow could be sold now for $20,000. The new, larger plow will cost $19,000 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 $136,000 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 20 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?

4. Prepare a net-present-value analysis of the proposed long runway. 5.Should the County Board of Representatives approve the runway considering NPV? 6. Which of the data used in the analysis are likely to be most uncertain? Which are likely to be least uncertain?

7.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 20 percent?