Reference no: EM132946188

Exercise - There has been a rapid increase in the number of house fires and forest fires in recent years. The chief of the Fire Defence Agency is deciding on whether to establish more fire stations around the city to enable more timely responses to fire outbreaks. Details about their current plan and proposed plan is provided below.

Current plan - There are two fire brigades that each comprise five firefighters: three trainees and two experienced firefighters. The operating costs of each brigade, excluding staff salaries, average $130,000 per year. The equipment at each station initially costed $220,000 and has a current salvage value of $50,000. All equipment is depreciated on a straight-line basis based on an expected useful life of 10 years.

Proposed plan - Establish four fire brigades that each comprise three firefighters: two trainees and one experienced firefighter. The operating costs of each brigade, excluding staff salaries, is estimated to average $100,000 per year. Two more stations will need to be built, which would each cost $125,000. All existing equipment will be sold and replaced by upgraded equipment that would cost $250,000 per brigade.

The average salary of trainee firefighters is $43,000 per year, while experienced firefighters earn $58,000 per year. A rate of return of 10% is required for capital investment projects. Ignore tax impacts.

Required -

(a) Calculate the net present value of the current plan and proposed plan. Assume a 15 year horizon for the analysis.

(b) Describe one qualitative consideration the chief should consider in making the decision and explain which plan you think should be chosen overall.