The Board of Representatives for Jefferson County 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, longer runway would enable the airport to handle the midsize jets used on many domestic flights. Data pertinent to the board's decision appears 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 data provided above, two other facts are relevant to the decision. First, a longer runway will require a new snow plow, which will cost $100,000. The old snow plow 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 county. 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 decides to use a 10-year time horizon. The county's hurdle rate for the capital project is 12 percent.
1. Prepare a net-present value analysis of the proposed longer runway.
2. Should the County Board of Representatives approve the runway? Explain.
Solution helps in analyzing the decision relating to construction of a longer runway at the county airport and in calculating NPV.