Question: Hyde Park Elementary has plans to build a new playground in 2017. They received a $120,000 government grant to be used for building the playground. They are hoping to break ground in May 2017 and complete the project by the start of school in September. Before they can start the project, however, they must dismantle the existing playground that has become unsafe based on current safety standards. They are also planning to complete soil testing once the existing playground is dismantled as a number of residential properties in the community have tested positive for soil contamination. Due to recent news articles, parents are very concerned about the potential for soil contamination and are demanding a full test to ensure their kids are not playing on a contaminated playground.
Sonya Muhammed, the school principal, has compiled the following estimates related to the new playground:
Cost for dismantling existing equipment $22,000
Salvage value from the metal from existing equipment $7,000
Soil testing $18,000
New playground equipment $45,000
Cost of installation $16,000
Cost of resurfacing play area in rubber $55,000
Cost of landscaping (including $5,000 for gravel) $22,000
Cost of removing and replacing soil $73,000
The costs for installation, resurfacing, landscaping, and soil removal are the costs quoted by professional contractors. Sonya was approached by the president of the student council, Josh Schwinn, who has volunteered the council's time for installing and landscaping the new playground. This will save the school approximately $25,000 in costs and Sonya has decided to accept this offer as two of the council members who will be helping are journeymen carpenters.
The school has two options in terms of dealing with the contaminated soil. The first option is to not partake in the soil testing and to simply resurface the play area with a poured-rubber matting that can cover the entire play surface. This will cost, as Sonya indicated in her estimates above, approximately $55,000 - a large chunk of the playground budget. The other option is to perform the soil testing. A municipal worker has estimated that there is a 40% chance that the soil is contaminated. If this is the case, the school will either need to resurface the area for $55,000 or it can have the contaminated soil removed and replaced for a hefty cost of $73,000 plus the cost of gravel. However, there is a 60% chance that the soil will not be contaminated. Sonya is wondering what they should do and has asked for your help.
REQUIRED
Prepare an analysis of the potential project costs for the following scenarios. Note: There is no need for gravel in the resurfacing scenario.
1. Resurface ground without doing soil testing.
2. Complete the soil testing. In this case there are two outcomes: remove/replace the soil if contaminated & resurface if contaminated.
Use the probabilities provided by the municipal worker to determine a weighted cost for each of these outcomes.
3. What option would you recommend for the school? Why? Are there other non-financial considerations that you need to include in your decision?