City Council member Alfred Garcia has proposed a new airport facility. The airport facility would provide the city with $200,000 in net cash flow landing fees, rent, etc.) and would cost $1,900,000. The city's Planning Department normally uses a 10% discount rate when evaluating capital projects. If the project has a 20 year life, the city council should adopt Garcia's proposal.

Question

Quizplus · Accepted Answer

Using the 10% discount rate and a 20-year life for the project, the present value of the $200,000 annual net cash flow can be calculated using the formula for the present value of an annuity. The present value of $200,000 per year for 20 years at a 10% discount rate is approximately $1,675,764. This is less than the project's cost of $1,900,000, suggesting the project's returns do not cover its costs under these conditions, hence the city council should not adopt Garcia's proposal based on this financial analysis.

City Council Member Alfred Garcia Has Proposed a New Airport