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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 $ 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 county’s hurdle rate for capital projects is 12 percent.   Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)   Required: 1. Prepare a net-present-value analysis of the proposed long runway.

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 $ 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 county’s hurdle rate for capital projects is 12 percent.   Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)   Required: 1. Prepare a net-present-value analysis of the proposed long runway.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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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 $ 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 county’s hurdle rate for capital projects is 12 percent.
 
Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

 

Required:
1. Prepare a net-present-value analysis of the proposed long runway. 

Future Value and Present Value Tables Table I Future Value of $1.00(1+r)^ Period 4% 6% 8% 10% 12% 14% 20% 1 1.040 1.060 1.080 1.100 1.120 1.140 1.200 2 1.082 1.124 1.166 1.210 1.254 1.300 1.440 3 1.125 1.191 1.260 1.331 1.405 1.482 1.728 4 1.170 1.263 1.361 1.464 1.574 1.689 2.074 5 1.217 1.338 1.469 1.611 1.762 1.925 2.488 6 1.265 1.419 1.587 1.772 1.974 2.195 2.986 7 1.316 1.504 1.714 1.949 2.211 2.502 3.583 8 1.369 1.594 1.851 2.144 2.476 2.853 4.300 9 1.423 1.690 1.999 2.359 2.773 3.252 5.160 10 1.480 1.791 2.159 2.594 3.106 3.707 6.192 11 1.540 1.898 2.332 2.853 3.479 4.226 7.430 12 1.601 2.012 2.518 3.139 3.896 4.818 8.916 13 1.665 2.133 2.720 3.452 4.364 5.492 10.699 14 1.732 2.261 2.937 3.798 4.887 6.261 12.839 15 1.801 2.397 3.172 4.177 5.474 7.138 15.407 20 30 3.243 5.744 40 40 4.801 2.191 3.207 4.661 6.728 9.646 13.743 10.063 17.450 29.960 10.286 21.725 45.260 93.051 188.880 1,469.800 38.338 50.950 237.380 Table II Future Value of a Series of $1.00 Cash Flows (Ordinary Annuity) (1 + r)n - 1 r Period 4% 6% 8% 10% 12% 14% 20% 1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 2 2.040 2.060 2.080 2.100 2.120 2.140 2.220 3 3.122 3.184 3.246 3.310 3.374 3.440 3.640 4 4.247 4.375 4.506 4.641 4.779 4.921 5.368 5 5.416 5.637 5.867 6.105 6.353 6.610 7.442 6 6.633 6.975 7.336 7.716 8.115 8.536 9.930 7 7.898 8.394 8.923 9.487 10.089 10.730 12.916 8 9.214 9.898 10.637 11.436 12.300 13.233 16.499 9 10.583 11.491 12.488 13.580 14.776 16.085 20.799 10 12.006 13.181 14.487 15.938 17.549 19.337 25.959 11 13.486 14.972 16.646 18.531 20.655 23.045 32.150 12 15.026 16.870 18.977 21.385 24.133 27.271 39.580 13 16.627 18.882 21.495 24.523 28.029 32.089 48.497 14 18.292 21.015 24.215 27.976 32.393 37.581 59.196 15 20.024 23.276 27.152 31.773 37.280 43.842 72.035 20 29.778 36.778 57.276 75.052 30 40 56.085 79.058 95.026 154.762 45.762 91.025 113.283 164.496 241.330 356.790 1,181.900 259.057 442.597 767.090 1,342.000 7,343.900 186.690 Table III 1 Present Value of $1.00 (1 + r)" Period 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 1 2 3 4 5 .822 .747 .681 .621 .567 .519 .476 .437 .962 .943 .926 .909 .893 .877 .862 .847 .833 .820 .806 .781 .769 .925 .890 .857 .826 .797 .769 .743 .718 .694 .672 .650 .630 .610 .592 .889 .840 .794 .751 .712 .675 .641 .609 .579 .551 .524 .500 .477 .455 .855 .792 .735 .683 .636 .592 .552 .516 .482 .451 .423 .397 .373 .350 .402 .370 .341 .315 .291 .269 .794 .758 .574 .435 .329 .250 671 o 8 .731 9 10 .676 .558 .463 .386 .322 .270 .227 .191 .162 .137 .116 .099 .085 .790 .705 .630 .564 .507 .456 .410 .370 .335 .303 .275 .760 .665 .583 .513 .452 .400 .354 .314 .279 .249 .222 .627 .540 .467 .404 .351 .305 .266 .233 .204 .179 .703 .592 .500 .424 .361 .308 .263 .225 .194 .167 .144 .125 .108 .094 .073 .250 .227 .207 .189 .198 .178 .159 .143 .157 .139 .123 .108 .082 .062 11 12 13 14 15 .145 .116 .577 .442 .340 .263 .205 .160 .125 .099 .555 .417 .315 .239 .183 .140 .108 .084 .650 .527 .429 .350 .287 .237 .195 .162 .135 .112 .094 .079 .066 .056 .047 .625 .497 .397 .319 .257 .208 .168 .137 .112 .092 .076 .062 .052 .043 .036 .601 .469 .368 .290 .229 .182 .093 .075 .061 .050 .040 .033 .027 .078 .062 .049 .039 .032 .025 .021 .065 .051 .040 .031 .025 .020 .016 20 30 40 .456 .312 .215 .149 .104 .073 .051 .037 .026 .019 .308 .174 .099 .057 .033 .020 .012 .007 .004 .003 .208 .097 .046 .022 .011 .005 .003 .001 .001 .014 .010 .007 .002 .001 .001 .005 .004 Table IV Present Value of Series of $1.00 Cash Flows 1½ ( 1 (1 1 (1 pm) Period 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 25% 26% 28% 30% 1 2 3 4 5 3.630 3.465 4.452 4.212 0.962 0.943 0.926 0.909 0.893 0.877 1.886 1.833 1.783 1.736 1.690 1.647 2.775 2.673 2.577 2.487 2.402 2.322 3.312 3.170 3.037 3.993 3.791 3.605 0.862 0.847 0.833 0.820 0.806 0.800 0.794 0.781 3.433 3.274 3.127 2.991 0.769 1.605 1.566 1.528 1.492 1.457 1.440 1.424 1.392 1.361 2.246 2.174 2.106 2.042 1.981 1.952 1.923 1.868 1.816 2.914 2.798 2.690 2.589 2.494 2.404 2.362 2.320 2.241 2.166 2.864 2.745 2.689 2.635 2.532 2.436 6 5.242 4.917 4.623 7 8 6.733 6.210 5.747 5.335 4.968 4.639 9 10 8.111 4.344 4.078 3.837 3.619 7.435 6.802 6.247 5.759 5.328 4.946 4.607 4.303 4.031 3.786 7.360 6.710 6.145 5.650 5.216 4.833 4.494 4.192 3.923 4.355 4.111 3.889 3.685 3.498 3.326 3.167 3.020 2.951 2.885 2.759 2.643 6.002 5.582 5.206 4.868 4.564 4.288 4.039 3.812 3.605 3.416 3.242 3.161 3.083 2.937 2.802 3.421 3.329 3.241 3.076 2.925 3.566 3.463 3.366 3.184 3.019 3.682 3.571 3.465 3.269 3.092 11 12 13 14 15 155 11.118 20 30 40 8.760 7.887 7.139 6.495 5.938 5.453 5.029 4.656 4.327 4.035 3.776 3.656 3.544 3.335 3.147 9.385 8.384 7.536 6.814 6.194 5.660 5.197 4.793 4.439 4.127 3.851 3.725 3.606 3.387 9.986 8.853 7.904 7.103 6.424 5.842 5.342 4.910 4.533 4.203 3.912 3.780 3.656 3.427 10.563 9.295 8.244 7.367 6.628 6.002 5.468 5.008 4.611 4.265 3.962 3.824 3.695 3.459 3.249 9.712 8.559 7.606 6.811 6.142 5.575 5.092 4.675 4.315 4.001 3.859 3.726 3.483 3.268 13.590 11.470 9.818 8.514 7.469 6.623 5.929 5.353 4.870 4.460 4.110 3.954 3.808 3.546 3.316 17.292 13.765 11.258 9.427 8.055 7.003 6.177 5.517 4.979 4.534 4.160 3.995 3.842 3.569 3.332 19.793 15.046 11.925 9.779 8.244 7.105 6.234 5.548 4.997 4.544 4.166 3.999 3.846 3.571 3.333 3.190 3.223
Transcribed Image Text:Future Value and Present Value Tables Table I Future Value of $1.00(1+r)^ Period 4% 6% 8% 10% 12% 14% 20% 1 1.040 1.060 1.080 1.100 1.120 1.140 1.200 2 1.082 1.124 1.166 1.210 1.254 1.300 1.440 3 1.125 1.191 1.260 1.331 1.405 1.482 1.728 4 1.170 1.263 1.361 1.464 1.574 1.689 2.074 5 1.217 1.338 1.469 1.611 1.762 1.925 2.488 6 1.265 1.419 1.587 1.772 1.974 2.195 2.986 7 1.316 1.504 1.714 1.949 2.211 2.502 3.583 8 1.369 1.594 1.851 2.144 2.476 2.853 4.300 9 1.423 1.690 1.999 2.359 2.773 3.252 5.160 10 1.480 1.791 2.159 2.594 3.106 3.707 6.192 11 1.540 1.898 2.332 2.853 3.479 4.226 7.430 12 1.601 2.012 2.518 3.139 3.896 4.818 8.916 13 1.665 2.133 2.720 3.452 4.364 5.492 10.699 14 1.732 2.261 2.937 3.798 4.887 6.261 12.839 15 1.801 2.397 3.172 4.177 5.474 7.138 15.407 20 30 3.243 5.744 40 40 4.801 2.191 3.207 4.661 6.728 9.646 13.743 10.063 17.450 29.960 10.286 21.725 45.260 93.051 188.880 1,469.800 38.338 50.950 237.380 Table II Future Value of a Series of $1.00 Cash Flows (Ordinary Annuity) (1 + r)n - 1 r Period 4% 6% 8% 10% 12% 14% 20% 1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 2 2.040 2.060 2.080 2.100 2.120 2.140 2.220 3 3.122 3.184 3.246 3.310 3.374 3.440 3.640 4 4.247 4.375 4.506 4.641 4.779 4.921 5.368 5 5.416 5.637 5.867 6.105 6.353 6.610 7.442 6 6.633 6.975 7.336 7.716 8.115 8.536 9.930 7 7.898 8.394 8.923 9.487 10.089 10.730 12.916 8 9.214 9.898 10.637 11.436 12.300 13.233 16.499 9 10.583 11.491 12.488 13.580 14.776 16.085 20.799 10 12.006 13.181 14.487 15.938 17.549 19.337 25.959 11 13.486 14.972 16.646 18.531 20.655 23.045 32.150 12 15.026 16.870 18.977 21.385 24.133 27.271 39.580 13 16.627 18.882 21.495 24.523 28.029 32.089 48.497 14 18.292 21.015 24.215 27.976 32.393 37.581 59.196 15 20.024 23.276 27.152 31.773 37.280 43.842 72.035 20 29.778 36.778 57.276 75.052 30 40 56.085 79.058 95.026 154.762 45.762 91.025 113.283 164.496 241.330 356.790 1,181.900 259.057 442.597 767.090 1,342.000 7,343.900 186.690 Table III 1 Present Value of $1.00 (1 + r)" Period 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 1 2 3 4 5 .822 .747 .681 .621 .567 .519 .476 .437 .962 .943 .926 .909 .893 .877 .862 .847 .833 .820 .806 .781 .769 .925 .890 .857 .826 .797 .769 .743 .718 .694 .672 .650 .630 .610 .592 .889 .840 .794 .751 .712 .675 .641 .609 .579 .551 .524 .500 .477 .455 .855 .792 .735 .683 .636 .592 .552 .516 .482 .451 .423 .397 .373 .350 .402 .370 .341 .315 .291 .269 .794 .758 .574 .435 .329 .250 671 o 8 .731 9 10 .676 .558 .463 .386 .322 .270 .227 .191 .162 .137 .116 .099 .085 .790 .705 .630 .564 .507 .456 .410 .370 .335 .303 .275 .760 .665 .583 .513 .452 .400 .354 .314 .279 .249 .222 .627 .540 .467 .404 .351 .305 .266 .233 .204 .179 .703 .592 .500 .424 .361 .308 .263 .225 .194 .167 .144 .125 .108 .094 .073 .250 .227 .207 .189 .198 .178 .159 .143 .157 .139 .123 .108 .082 .062 11 12 13 14 15 .145 .116 .577 .442 .340 .263 .205 .160 .125 .099 .555 .417 .315 .239 .183 .140 .108 .084 .650 .527 .429 .350 .287 .237 .195 .162 .135 .112 .094 .079 .066 .056 .047 .625 .497 .397 .319 .257 .208 .168 .137 .112 .092 .076 .062 .052 .043 .036 .601 .469 .368 .290 .229 .182 .093 .075 .061 .050 .040 .033 .027 .078 .062 .049 .039 .032 .025 .021 .065 .051 .040 .031 .025 .020 .016 20 30 40 .456 .312 .215 .149 .104 .073 .051 .037 .026 .019 .308 .174 .099 .057 .033 .020 .012 .007 .004 .003 .208 .097 .046 .022 .011 .005 .003 .001 .001 .014 .010 .007 .002 .001 .001 .005 .004 Table IV Present Value of Series of $1.00 Cash Flows 1½ ( 1 (1 1 (1 pm) Period 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 25% 26% 28% 30% 1 2 3 4 5 3.630 3.465 4.452 4.212 0.962 0.943 0.926 0.909 0.893 0.877 1.886 1.833 1.783 1.736 1.690 1.647 2.775 2.673 2.577 2.487 2.402 2.322 3.312 3.170 3.037 3.993 3.791 3.605 0.862 0.847 0.833 0.820 0.806 0.800 0.794 0.781 3.433 3.274 3.127 2.991 0.769 1.605 1.566 1.528 1.492 1.457 1.440 1.424 1.392 1.361 2.246 2.174 2.106 2.042 1.981 1.952 1.923 1.868 1.816 2.914 2.798 2.690 2.589 2.494 2.404 2.362 2.320 2.241 2.166 2.864 2.745 2.689 2.635 2.532 2.436 6 5.242 4.917 4.623 7 8 6.733 6.210 5.747 5.335 4.968 4.639 9 10 8.111 4.344 4.078 3.837 3.619 7.435 6.802 6.247 5.759 5.328 4.946 4.607 4.303 4.031 3.786 7.360 6.710 6.145 5.650 5.216 4.833 4.494 4.192 3.923 4.355 4.111 3.889 3.685 3.498 3.326 3.167 3.020 2.951 2.885 2.759 2.643 6.002 5.582 5.206 4.868 4.564 4.288 4.039 3.812 3.605 3.416 3.242 3.161 3.083 2.937 2.802 3.421 3.329 3.241 3.076 2.925 3.566 3.463 3.366 3.184 3.019 3.682 3.571 3.465 3.269 3.092 11 12 13 14 15 155 11.118 20 30 40 8.760 7.887 7.139 6.495 5.938 5.453 5.029 4.656 4.327 4.035 3.776 3.656 3.544 3.335 3.147 9.385 8.384 7.536 6.814 6.194 5.660 5.197 4.793 4.439 4.127 3.851 3.725 3.606 3.387 9.986 8.853 7.904 7.103 6.424 5.842 5.342 4.910 4.533 4.203 3.912 3.780 3.656 3.427 10.563 9.295 8.244 7.367 6.628 6.002 5.468 5.008 4.611 4.265 3.962 3.824 3.695 3.459 3.249 9.712 8.559 7.606 6.811 6.142 5.575 5.092 4.675 4.315 4.001 3.859 3.726 3.483 3.268 13.590 11.470 9.818 8.514 7.469 6.623 5.929 5.353 4.870 4.460 4.110 3.954 3.808 3.546 3.316 17.292 13.765 11.258 9.427 8.055 7.003 6.177 5.517 4.979 4.534 4.160 3.995 3.842 3.569 3.332 19.793 15.046 11.925 9.779 8.244 7.105 6.234 5.548 4.997 4.544 4.166 3.999 3.846 3.571 3.333 3.190 3.223
Incremental operating costs for new snow plow Incremental revenue from landing fees 40,000 Additional tax revenue 64,000 Runway maintenance (28,000) Annual incremental benefit Annuity discount factor Present value of annual benefits Initial costs: Add: Salvage value of old snow plow Less: New snow plow Less: Extension of perimeter fence $ 76,000 5.650 $ 429,400 10,000 Less: Land acquisition Less: Runway construction Less: Runway lights Net present value $ 439,400
Transcribed Image Text:Incremental operating costs for new snow plow Incremental revenue from landing fees 40,000 Additional tax revenue 64,000 Runway maintenance (28,000) Annual incremental benefit Annuity discount factor Present value of annual benefits Initial costs: Add: Salvage value of old snow plow Less: New snow plow Less: Extension of perimeter fence $ 76,000 5.650 $ 429,400 10,000 Less: Land acquisition Less: Runway construction Less: Runway lights Net present value $ 439,400
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