Question

The chief ranger of the state’s Department of Natural Resources is considering a new plan for fighting forest fires in the state’s forest lands. The current plan uses eight fire-control stations, which are scattered throughout the interior of the state forest. Each station has a four-person staff, whose annual compensation totals $360,000. Other costs of operating each base amount to $260,000 per year. The equipment at each base has a current salvage value of $280,000. The buildings at these interior stations have no other use. To demolish them would cost $26,000 each.

The chief ranger is considering an alternative plan, which involves four fire-control stations located on the perimeter of the state forest. Each station would require a six-person staff, with annual compensation costs of $460,000. Other operating costs would be $270,000 per base. Building each perimeter station would cost $360,000. The perimeter bases would need helicopters and other equipment costing $660,000 per station. Half of the equipment from the interior stations could be used at the perimeter stations. Therefore, only half of the equipment at the interior stations would be sold if the perimeter stations were built.

The state uses a 10 percent hurdle rate for all capital projects.

Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required:
1. Use the total-cost approach to prepare a net-present-value analysis of the chief ranger’s two fire-control plans. (Assume that the interior fire-control stations will be demolished if the perimeter plan is selected. The chief ranger has decided to use a 10-year time period for the analysis.) (Round your "Discount factors" to 3 decimal places. Negative amounts should be indicated by a minus sign.)

Answer 1

Particular	Amount ($)	Working
Interior fire control station ( 8 stations )
Staff annual compensation	-2880000	(360000 * 8)
Other Operating annual Cost	-2080000	( 260000 * 8 )
Total annual cash flow	-4960000
Annuity discount factor (10% , 10 years )	* 6.145	( PVAF [ 10% , 10 ] )
Net present value of cost (A)	-30479200
Perimeter fire control station
Staff annual compensation	-1840000	( 460000 * 4)
Other Operating annual Cost	-1080000	( 270000 * 4)
Total annual cash flow	-2920000
Annuity discount factor (10% , 10 years )	*6.145	( PVAF [ 10% , 10 ] )
Present value of annual cash flows	-17943400
Construction cost ( time = 0 )	-1440000	( 360000 * 4)
Acquisition of equipment ( time = 0)	-2640000	( 660000 * 4)
salvage value of half of old equipment	1120000	(280000 * 8 / 2)
demolition of old station	-208000	( 26000 * 8)
Net present value of costs (B)	-21111400
Difference in NPV of costs ( A -B )	-9367800