=+b The Balmoral base was built at a cost of $75 million on land leased by the navy from private citizens. The navy can choose to lease the land permanently for a lease payment of $1.5 million per year. If it decides to keep the Balmoral base open, the navy plans to invest $30 million in a fixed income note, which at 5% interest will earn the $1.5 million the government needs for the lease payments. The land and buildings will immediately revert back to the owner if the base is closed. The operating costs of the base, excluding lease payments, are $150 million per year.

c If the Nowra base is shut down, the navy will have to transfer some personnel to the Balmoral facility. As a result, the yearly operating costs at Balmoral will increase by $50 million per year. If the Balmoral facility is closed down, no extra costs will be incurred to operate the Nowra facility.

Required Naval Headquarters in Canberra argues that it is cheaper to shut down the Balmoral base for two reasons: (1) it would save

$50 million per year in additional costs required to operate the Balmoral base; and (2) it would save the lease payment of

$1.5 million per year. (Recall that the Nowra base requires no cash payments for use of the land because the land is owned by the navy.) Do you agree with Naval Headquarters’ arguments and conclusions? In your answer, identify and explain all costs that you consider relevant and all costs that you consider irrelevant for the base-closing decision.

Chapter 8: Decision making and relevant information 331 M08_HORN3377_02_LT_C08.indd 331 2/09/13 3:42 PM