The City of Aviation is considering undergoing a major expansion and will be building a new terminal at its major international airport. The cost of the terminal is estimated to be $3.6 billion dollars which is similar to the cost of Salt Lake Cityâ€™s new terminal. Assume all initial construction costs are paid in year 0.
The new terminal will be financed entirely with bonds paying 5.75 percent. The project will have a 40 year life. In year 21 a major renovation is projected and projected to have a price of 1.2 billion dollars in year 21. The 1.2 is in year 21 dollars.
Revenue assumptions are:
Total aeronautical revenue per year $140,000,000
Total non-aeronautical revenue per year $175,000,000
Total aeronautical revenue is projected to grow at 2.5 percent per year and total non-aeronautical revenue is projected to grow at 6 percent per year.
Total expenses are projected to be 60 percent of each yearâ€™s total revenue.
Solve the Problem
Create a timeline to model the project and calculate the Net Present Value (NPV) of the project. Disregard taxes and depreciation in your analysis
What is the NPV?
Based on the analysis should the project be pursued?