(14 marks) The city of Calgary has two options before it:

(1) Extend the life of the existing Saddledome ten more years, then build a replacement arena that

will last twenty years after that.

(2) Build a new arena today that will last thirty years.

Under option (1), the existing Saddledome will generate average annual revenues of $100 million

and incur average annual expenses of $75 million for the remainder of its life. The replacement

arena will generate average annual revenues of $200 million and incur average annual expenses of

$75 million in expenses over its twenty years of life. The replacement arena will cost $400 million

to build (ten years from now and including the demolition cost of the Saddledome).

Under option (2), the new arena will cost $600 million to build today (including the demolition cost

of the Saddledome) and will generate average annual revenues of $150 million and incur average

annual expenses of $50 million per year over its thirty years of life.

Assume that, under either option, the city can borrow without limit at an interest rate of five percent.

a. (8 marks) Calculate the present value of the profits the current Saddledome will generate for its

remaining ten years.

b. (2 marks) Calculate the present value of the profits the replacement arena is expected to generate

for its twenty years of life. (Note: your answer will be the present value if we were in 2030, so

you will need to discount that value ten periods to get into 2020 terms.)

c. (2 marks) Calculate the present value of the construction cost of the replacement arena.

d. (2 marks) Use parts (a) - (c) to calculate the net profit created under option 1.

e. (2 marks) Calculate the present value of the profits the new arena is expected to generate for its

thirty years of life.

f. (2 marks) Use part (e) along with the construction cost of the new arena to calculate the net

profit created under option 2.

g. (2 marks) Briefly explain which option is preferable.