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?
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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Washington County's 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 board's decision appear below.
Cost of acquiring additional land for runway
Cost of runway construction
Cost of extending perimeter fence
Cost of runway lights
Annual cost of maintaining new runway
Annual incremental revenue from landing fees
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 $105,000. The old snowplow could be sold now for $10,500. The new, larger plow will cost
$6,000 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 $68,000 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 county's hurdle rate for capital
projects is 12 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?
Complete this question by entering your answers in the tabs below.
Req 1
$ 60,000
305,000
53,937
30,000
15,000
20,000
Req 2
Req 3A
Req 3B
Compute the initial cost of the investment in the long runway.
Initial cost of investment](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7ab872bc-c3bb-4f50-913f-8c8eef9f19ee%2Ffbefbdd4-56c3-4fa2-8dcb-5f2939245e50%2F3hnckbg_processed.jpeg&w=3840&q=75)
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