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 $370,000. Other costs of operating each base amount to $270,000 per year. The equipment at each base has a current salvage value of $290,000. The buildings at these interior stations have no other use. To demolish them would cost $27,000 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 $470,000. Other operating costs would be $280,000 per base. Building each perimeter station would cost $370,000. The perimeter bases would need helicopters and other equipment costing $670,000 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. The chief ranger has decided to use a 10-year time period for the analysis.

Answer 1

Answer page.:01 Required the chief ranger's control plan and net - present value analysis decision between the interior fine the perimeter fire - contro plan. we will use cost approach here so, we will calculate net present value of all the costs for both the plans and then compare them, current plan present value of Annual cost a (staff salary + · operating cost) x PVAF (10,1,10) paesent value Annual cost = ( 340000 8 + 240000x8) x 6.144 (5120000) X6.194 31457280 new proposed plan anitial Investment - Building cost + Helicopter of other equipment + ciemolition cost - salvage value of Cutrient equipment ($475,000 x4) + ($670000X4)+($ 27000X 8) ( +090000 *8)

= $4476000 - $ 2390000 page-02 = $ 2456000 Annual cost = staff salary fother cost = ($ 470,000 x 4) + ($ 280,000 X 4) = $1880000 +41120000 = $ 3000000 - net present value = (Annual cost x factor). initial invest ment = $ 3000000 x 6.144)-(-$ 2456000) = $18732000+ $ 2456000 $20888000 incremental cost = npw of current plan - rpv of - nipv of a new plan - 31457280 - 0888000 - 10569280 Npv interior stationsiperimeter stations | 410569280