I am attaching a document. The 3 questions for the case start on Page 11. I would like all three questions answered.

ATLANTA KESTREL'S CAPITAL BUDGETING DECISION ABSTRACT This case examines a capital budgeting decision context where financial and nonfinancial information both need to be considered. The nonfinancial and financial informationNet Present Value (NPV), Internal Rate of Return (IRR), and payback period calculationsdo not all lead to a clear decision path on which of three potential investment options should be pursued. The case also introduces an analytical hierarchy process (AHP) decision-making tool that allows students to simultaneously weight the quantitative and qualitative information, thereby aiding them to make a \"better\" capital investment decision. Key words: capital budgeting; analytical hierarchy process; capital investments; decision-making Page 1 of 18 ATLANTA KESTREL'S CAPITAL BUDGETING DECISION Introduction \"I'm still not sure what the best option is, but I think we're making good progress,\" Mike Mayhew said to the other seven members of the executive staff. \"I feel confident that we have eliminated all of the unacceptable projects, which either have a negative NPV or that are clearly at odds with the Kestrels' new strategy.\" Mike paused to gather his thoughts before continuing, and then he said, \"It's going to be tough to decide among the remaining three options. Let's all consider the three options individually, analyze the options using the Analytic Hierarchy Process (AHP) worksheet provided by Casey Potts, our choice coach, and then meet again in one week to make a final decision.\" As everyone stood up and walked to the front of the room to put their hands together and say the team cheer, Mike said, \"Remember, the AHP is meant to help close the uncertainty gap, but we'll still need to spend a considerable amount of time justifying our rankings.\" After everyone huddled together in a circle, and put their right hand in the center of the circle, they simultaneously chanted the team's cheer: Who are we? We are the Kestrels And this is what we do: We dribble, we pass it, We fly to the basket, And then we dunk on you! Caaah! Caaaah! Page 2 of 18 As the executive staff left the room, they all flapped their arms to imitate a flying Kestrel, and then wiped the spit off of their faces from imitating the Kestrel squeal. Background 1 In May 2012, Mike Mayhew, a season ticket holder and wealthy investor, purchased the Atlanta Kestrels professional basketball team because he thought that he could improve the lethargic atmosphere at the games. During the last fifteen years, the Kestrels have had a poor record and poor fan base. Mr. Mayhew has implemented a new strategy to turn the Kestrel's performance around. Mayhew's mission is \"to have fun.\" In so doing, Mayhew wants both the players and coaches to feel like they are more than just an investment. He wants them to feel like they're part of a brotherhood with a mission to not only win a championship, but to be good role models to basketball fans in the Atlanta area. For the most part, Mayhew stays out of the affairs of the team's front office. However, he does try to prevent the coach from overly tinkering with the team's roster. He would strongly prefer to stick with his mediocre roster, than to make a risky move like replacing an average team player with a stand out college player from a small conference. Mayhew sees himself as a motivator and marketer, not a coach. He attends every home game, and many of the away games. He wears jeans and t-shirts to games to strengthen the impression that he is one of the fans...and he is! He is constantly yelling at the referees and if the camera guys are not showing him while he yells at the refs, he yells at them, too. He also wants to do as much as he can to improve the public opinion of how fun Kestrel's basketball games can be. As part of his strategy, he has implemented the following five strategic initiatives: 1 Many of the details of this case are modeled after what Mark Cuban, majority owner of the Dallas Mavericks, has done to convert a struggling team into consistent playoff contenders and champions. (MacMahon 2010) Page 3 of 18 1- Increase the quality of staff and players. 2- Improve the team's image. 3- Improve the in-game experience for fans. 4- Maintain strategic adaptability / flexibility. 5- Make a profitable investment. The first strategic initiative, obtain the best staff and players, is extremely important to Mayhew because he knows that winning games is the most important element of improving the in-game experience, and has proven to be highly correlated with fan attendance. Indeed, it creates more energy and enthusiasm for the games than any in-game side show. While Mayhew is wealthy enough to \"buy\" the players who are currently considered the best in the league, certain league rules prevent Mayhew from doing so to keep games competitive. Specifically, luxury taxes, collective bargaining agreements related to revenue sharing, free agency rules, and draft procedures are all designed to ensure that the best players are not all owned by the wealthiest team owners or the teams in the largest markets. 2 However, Mayhew believes that by providing the best facilities and accommodations for the players and staff that they can (1) develop mediocre players into great players, and (2) develop a reputation that will attract and retain top players when they become free agents. The second initiative, improving the team's image, refers to how well the Kestrels franchise brand is managed. Mayhew wants peoples' gut reaction to the word \"kestrels\" to be 2 The NBA's collective bargaining agreement was updated in 2013. The major updates are listed on ESPN. (Coon 2011) Page 4 of 18 synonymous with quality and fun. Mayhew believes that this objective is moderately important. To manage the franchise well, Mayhew wants to support a culture of integrity by providing fun, wholesome half-time entertainment. He would also prefer that the players are good role models, rather than players who attract attention because of their wild behavior, so that the youth who look up to the players will not emulate self-destructive behavior. Mayhew also wants the team to support events that strengthen the community. To be perceived as a top-of-the-pack team by players and other coaches within the league, Mayhew believes that the Kestrels should have state of the art facilities and equipment. While all major financial decisions should be carefully evaluated, Mayhew knows that he can afford to be a little risky because he is willing to use some of his vast personal wealth to make up for poor financial outcomes. The third initiative is improving the in-game experience for fans. 3 Because Mayhew believes that they are in the business of selling fun, rather than basketball, he wants to make sure that each game is a participatory, inclusive, memorable, fun experience. After all, what people remember most about sporting events, is sharing a good experience with friends and relatives. He wants everyone who attends to have something that they will remember and talk about for the rest of their lives. He wants the guy on the date to know that he will not have to think of something to talk about during the date, or in between dates, other than the game and the related experiences. Mayhew believes that this initiative is extremely important. The fourth initiative, maintain strategic adaptability / flexibility, refers to the ability for the Atlanta Kestrels to change their product offering as market forces change. For instance, if the current customers suddenly start desiring to see more hockey games rather than basketball 3 Much of this paragraph comes from Mark Cuban's blog. (Cuban 2011) Page 5 of 18 games, the Kestrels would like to maintain the ability to reduce costs so that they are not run out of business. Like a sail on a boat that can adjust to different wind directions and speeds so that it can still reach its destination, the Kestrels prefer that their strategy is adjustable to changing market conditions so that they benefit from the changing market forces, rather than be destroyed by them. Thus, an adaptable strategic investment is one that would have a low cost of reversing a prior capital investment decision. The fifth initiative, make a profitable investment, refers to the profitability of their investment choice. Kestrels uses several methods to evaluate the profitability of their investments including, net present value, internal rate of return, and payback period. Mayhew recognizes that ultimately, every objective should have an impact on the profitability objective; however, accurately assessing the financial impact of each objective is difficult since it is so subjective. While Mayhew will not consider an investment that does not have a positive net present value, or an internal rate of return that is below the minimum required rate of return, Mayhew already has a vast personal wealth and is not as interested in making a quick profit. Thus, in contrast to many team owners, this initiative is probably the least important objective to Mayhew, as long as profitability is within reason. Mayhew is anxious to start working on the initiatives, but realizes that each initiative is not equally important. The executive staff, consisting of Mayhew and seven others, 4 has discussed a wide array of actions that they can take to make progress on the initiatives. They have narrowed down the list to the top three options. Because the staff does not want to dilute their focus by 4 The other seven people are the chief administrative officer, the general manager, VP of sales and marketing, VP of ticket sales retention and data base operations, VP of communications and community relations, VP of human resources, and VP of guest relations. Page 6 of 18 making too many major changes at the same time, they have decided that they will only accept one option this year. These options are: 1- Build a new arena 2- Recruit two star players 3- Renovate and Reimage Details about each of the options Option 1: Build a new arena The Kestrel's current arena is 20 years old. While it still has approximately 10 years of useful life left, many teams in the league have recently built new arenas. Most teams have used their arenas for only 20 years before building a new one. The average age of arenas in the league is 15 years. Many of these arenas have been built to accommodate the technological advances related to player training and conditioning, as well as broadcasting. The current arena has a capacity of 17,000 seats, and the new arena would have a capacity of about 19,000 seats. Building a new arena is expected to have a very strong impact on the quality of the staff and players as a result of drastically improving the training and physical therapy facilities for players, as well as the accommodations for the staff. The new arena should have a moderate impact on the way that the Kestrels brand is perceived since it demonstrates a substantial financial commitment to the team. The new arena should have only a very weak impact on improving the in-game experience of the fans. There will undoubtedly be some initial curiosity with the new facilities, but by itself it will not do much to improve the current lethargy during the games. The arena would primarily be used by the Kestrels, although they could lease it Page 7 of 18 during the off-season for concerts and other non-basketball events. Because there are not many other groups that would want to use the arena, the Kestrels could only sell the arena for a fraction of the original cost. Thus building the arena would guarantee that the Kestrels are committed to staying in Atlanta for the foreseeable future. It would also tie up a lot of money making this option weak in terms of strategic adaptability. The financial details of the profitability of the new arena are summarized in the next paragraph. Financial Details 5: The new arena will require an immediate cash payment of $22 million at the beginning of the first year of operation. It is expected to last for 30 years, at which point it would likely have a salvage value of $1.5 million. It would be depreciated using the straight line method over 30 years. It will increase capacity from 17,000 to 19,000, leading to an increase in expected annual revenue by $4.1 million ($50 x 2,000 seats x 82 regular season games x 50% home games). Because the new arena will also have more box seats and advertising space and can be leased for concerts during the off-season, the Kestrels expect to raise an additional $5 million per year from luxury suites, sponsorships, and concert fees. It will cost an additional $100,000 in out of pocket costs per year to staff and maintain. These financial details are summarized in Table 1. Option 2: Recruit a star player Obtaining good players depends on what type of player a team is looking for. Hiring good rookies is largely a function of the team's past performance, and chance. In contrast, recruiting veteran players is thought to be largely a function of salary, and a team's potential to win a championship. Because the Kestrels have done so poorly the last two years, they have a 5 Table 1 summarizes the results of the financial analyses for each option. The Atlanta Kestrels have an effective tax rate of 30% and use a 15% cost of capital for capital investment decisions. Page 8 of 18 75% chance of getting one of the first four draft picks in the NBA lottery during the last week in May. They have their sights set on one of four exceptional rookies. If they can recruit one of the four rookies, then they believe that they can also attract a top veteran to join their team for a relatively high salary. Signing two star players will have a extremely strong impact on the overall quality of the players on the team. It will have a moderate impact on the team's image and the in-game experience since fans and other teams will expect more wins from the Kestrels. The contracts for the two star players would be for 15 years; however, players are frequently traded mid contract. If that happens, then the acquiring team will pick up the rest of the contract, and probably add more on to that. Thus, the extra money received would moderately strengthen strategic adaptability. The financial details of the profitability of signing two star players are summarized in the next paragraph. Financial Details: The Kestrels can expect to pay $3.5 million for the rookie's first year which will increase by 26% each year up to a maximum of $15 million per year. If they do get one of the top four players, they think that they also have a really good chance of attracting a star free-agent for $15 million per year, in addition to a $15 million signing bonus payable at the beginning of the first year. The Kestrels expect that annual ticket sales revenue will increase by $11 million. In addition, the Kestrels expect annual media revenue to increase by $2 million for the first year, and to grow by 33% for each of the subsequent 14 years. Finally, annual sponsorship revenue is expected to be $7 million higher for each of the next 15 years. These financial details are summarized in Table 1. Option 3: Renovate and Reimage Page 9 of 18 Renovating and reimaging consists of a number of actions. First, Mayhew will make sure that the existing locker rooms and training facilities are updated to reflect the newest technological advances. This will include above-court cameras that can record detailed information about each player's performance, which can then be analyzed and evaluated using new statistical methods similar to what is used in baseball. Second, Mike Mayhew would bring in high-profile halftime performers including magicians, celebrities, and acrobatsacts that would appeal to more than just sports fans. Third, Mayhew would install a new screen above the court to display highlights, half-time performances, and replays. Mayhew would also invest in the creation of video profiles about each of the individual players that could be displayed on the new screen. Fourth, Mayhew will allocate resources to renovating the corporate suites so that they include more luxury seats, multiple flat screen TVs, and more modern interior decorations. Customer service and catering for the corporate suites will also be improved. Mayhew would also build a new parking structure to accommodate the increased attendance. Mayhew will also invest in the creation of digital software to improve the in-game experience for those serious sports fans who want to see multiple camera angles of a play or get more in-depth statistics than what is shown in the box score. Finally, Mayhew wants to pay for promotions such as offering free Quiznos sandwiches every time the team scores more than 100 points during a home game. 6 As a result of updating the facilities to reflect the state of the art in training, analytics, media, and comfort, Mayhew expects the renovating and reimaging actions to have a very strong impact on the quality of staff and players, as well as the team's image. However, the biggest 6 This is not an uncommon perk for fans of professional basketball teams. This type of promotion has occurred, for example, for the Dallas Mavericks (Barshad 2012), the Toronto Raptors (nba.com, the Chicago Bulls (Friedell 2012), and the L.A. Lakers. Page 10 of 18 impact will be on the in-game experience of fans, which is expected to be extremely strong. The renovation and reimaging activities will have a moderate impact on local ticket sales and the local broadcasting revenue. The only long term commitment associated with this option is the initial investment in upgrading the existing facilities, thus this option is very strong in terms of strategic adaptability. The financial details of the profitability of the \"renovate and reimage\" option are summarized in the next paragraph. Financial Details: The investment for the parking structure, screen, and various facilities renovations is expected to cost $5 million, last for 20 years, and have a zero salvage value. The cost of creating a new logo is $50,000. The half-time shows and video profiles will cost an additional $1,400,000 per season. The annual cost of paying for Quiznos subs is expected to be $500,000 ($5 per sandwich * 10 home games over 100 points * 10,000 customers who cash in). The investment associated with creating a new image is expected in increase revenue in several ways. First, the number of tickets, and the market price of tickets is expected to increase revenue by $1,900,000 per season. Also, the annual revenue from advertising, sponsorships, and jerseys is expected to increase by $1,000,000. These financial details are summarized in Table 1. Required 1) Calculate the net present value, internal rate of return, and the payback period for each of the three options. Be sure to incorporate the tax rate and depreciation tax shield when making these calculations. (Hint: you should do this in Excel since cash flows are uneven.) 2) Which of the three options is superior from a purely financial point of view? (based on your financial calculations in #1.) Page 11 of 18 3) Use the CORE2 decision-making framework, summarized in Table 2, and the Analytic Hierarchy Process (see Appendix for example of using the Analytic Hierarchy Process) to help you decide which of the three options the Kestrels should choose. Be prepared to present your decision, and justify why you think that decision is best. APPENDIX A Simple Example of Using the Analytic Hierarchy Process (AHP) This appendix provides a simple example of how to use the Analytic Hierarcy Process (AHP) to assist you in resolving upon the best option. Suppose you are trying to decide where to eat lunch. 7 The objectives that are most important to you are (1) taste, (2) health, and (3) cost. The restaurant options that you would like to eat at are Best Burgers (BB), Splendid Sub Sandwiches (SSS), and Gourmet Greek Gyros (GGG). The following \"consequence table\" helps to summarize the relevant information for each option on each objective. Options Best Burgers (BB) Objectives Splendid Sub Gourmet Sandwiches Greek Gyros (SSS) (GGG) Taste Excellent Good Excellent Health Poor Very good Moderate Cost $5 $8 $10 If this decision were based solely on identifying the option that is superior in terms of one objective, say cost, then it would be easy to identify the best option, Best Burgers, because it has the lowest cost. However, when there are many objectives, and none of the options dominates the other options for all objectives, then the decision becomes more complex. An additional piece of complexity is that not all of the options are of equal importance. For instance, you may think that health is much more important than cost and taste, and cost is only slightly more 7 We acknowledge that this is probably not a problem that merits careful analysis, but it's useful for illustration purposes because of its simplicity and familiarity. Page 12 of 18 important than taste. This makes identifying the best decision much more difficult to analyze without some help. The Analytic Hierarchy Process (AHP) facilitates the decision-making process by breaking down large, complex decisions into small, easy decisions by making a series of pairwise comparisons. 8 The results of the pairwise comparisons are used to (1) develop weights for the objectives, and (2) to compare each option to each other for each objective. This process is illustrated below. First, three pairwise comparisons should be made to develop weights for the three objectives. For each pairwise comparison, one must divide 100 points between the two objectives based on relative importance. Point allocations for each pairwise comparison of the objectives are described as follows: 1. Taste vs. health: Suppose taste is exceedingly more important than health to you, so you might allocate 90 points to taste, and 10 points to health. 2. Taste vs. cost: Suppose taste is slightly more important than cost to you, so you might allocate 60 points to taste and 40 points to cost. 3. Health vs. cost: Suppose cost is considerably more important than health to you, so you might allocate 80 points to cost and 20 points to health. Based on the preceding pairwise comparisons, objective weights are calculated and will be used in the final evaluation. While the object of this case is not to explain how those objective weights are calculated, two points are worth mentioning. First, this is not an exact science, so don't get too caught up in making exact point allocations. Second, the last pairwise comparison between health and cost should be consistent with the first two comparisons. In other words, if taste is allocated 80 more points than health, and taste is allocated 20 more points than cost, then cost should be allocated 60 more points than health. After determining the objective weights, 8 In contrast to ratings on an absolute scale, pairwise comparisons force the decision maker to relative comparisons. Such comparisons are particularly important for qualitative objectives that cannot be objectively assigned a numeric value. Page 13 of 18 pairwise comparisons among the three options (restaurants) are made for each of the three objectives (taste, health, and cost) by using the same point allocation method. Referring to the preceding consequence table, these allocations are described below: 1. Taste a. BB vs. SSS: Because BB is \"excellent\" and SSS is \"good,\" you allocate 70 points to BB and 30 points to SSS. b. BB vs. GGG: Because BB and GGG are \"excellent,\" you make an equal allocation of 50 points to each restaurant. c. SSS vs. GGG: Because SSS is \"good\" and GGG is \"excellent,\" you allocate 30 points to SSS and 70 points to GGG. 2. Health a. BB vs. SSS: Because BB is \"poor\" and SSS is \"very good,\" you allocate 30 points to BB and 70 points to SSS. b. BB vs. GGG: Because BB is \"poor\" and GGG is \"moderate,\" you allocated 40 points to BB and 60 points to GGG. c. SSS vs. GGG: Because SSS is \"very good\" and GGG is \"moderate,\" you allocate 60 points to SSS and 40 points to GGG. 3. Cost a. BB vs. SSS: Because BB costs $5 and SSS costs $8, you allocate 60 points to BB and 40 points to SSS. b. BB vs. GGG: Because BB costs $5 and GGG costs $10, you allocate 70 points to BB and 30 points to GGG. c. SSS vs. GGG: Because SSS costs $8 and GGG costs $10, you allocate 55 points to SSS and 45 points to GGG. After finishing the pairwise comparisons, the weighted score for each restaurant option can be tabulated. These scores are normalized such that the highest scoring restaurant receives a value of 100%, and the other two restaurant scores are quantified in terms of how close they are to 100%. Page 14 of 18 Page 15 of 18 Table 1 Summary of Key Financial Data for Each Option Given Information for Building a New Arena Interest rate 12% Tax rate 35% Cost of stadium ($22,000,000) Life of stadium (in years) 30 Salvage value $1,500,000 Additional annual operating costs ($100,000) Annual increase to ticket sales revenue $4,100,000 Additional annual luxury and sponsorship revenue $5,000,000 Given Information for Star Players Interest rate Tax rate Length of investment (in years) Additional salary for star rookie* Additional salary for star free agent Signing bonus for star free agent Annual increase to ticket sales revenue Annual increase to media revenue** Annual increase to sponsorship revenue Growth rate of star rookie until it hits $15 million 12% 35% 15 ($3,500,000) ($15,000,000) ($15,000,000) $11,000,000 $2,000,000 $7,000,000 26% *Increases by 26% each year to a maximum of $15 million. **Increases by 33% each year for 14 years. Given Information for Renovate and Rebrand Interest rate 12% Tax rate 35% Renovation cost ($5,000,000) Life of renovation (in years) 20 Increase in salvage value $0 Cost of designing new logo ($50,000) Annual increase to ticket sales revenue $1,900,000 Annual increase to advertising revenue $1,000,000 Additional half-time show cost ($1,400,000) Annual cost of Quiznos subs ($500,000) Page 16 of 18 Table 2 Summary of the Eight Steps in the CORE2() Decision-Making Framework 1 CLARIFY the problem C 2 CLASSIFY the problem 3 OBJECTIVES are defined O 4 OPTIONS are identified 5 RESOLVE the best choice R 6 REFLECT on your choice 7 EXECUTE your choice E 8 EVALUATE your choice Page 17 of 18 In these first two steps, the problem is accurately clarified (by asking \"Why?\" at least five times) and classified (to determine how much effort should be allocated to finding the solutions). As a result of performing these two steps, a Consequence Table is developed, so all options can be compared against all objectives, using a pair-wise comparison process. Using the Consequences Table and a proven pair-wise process to compare hard-to-quantify \"apples and oranges,\" the solution is selected and then reflected upon in terms of tradeoffs, risks & core values to determine feasibility. Even the best solutions are meaningless if they are not fully and efficiently executed. The entire process is then evaluated over time to improve your future decisions. REFERENCES Barshad, A. 2012. A Brief Look at Notable Moments in NBA Free-Food History. The Triangle. Available at: http://grantland.com/the-triangle/a-brief-look-at-notable-moments-innba-free-food-history/ Coon, L. 2011. Breaking down changes in new CBA. ESPN.com. Available at: http://espn.go.comba/story/_/page/CBA-111128/how-new-nba-deal-compares-last-one Cuban, M. 2011. http://blogmaverick.com/2011/12/24/the-fan-experience-at-sporting-eventswe-dont-need-no-stinking-smartphones/ Friedell, N. 2012. Joakim Noah regrets 3-pointer. ESPN.com. Available at: http://espn.go.com/chicagoba/story/_/id/8604195/joakim-noah-chicago-bulls-regrets-3point-attempt-big-macs MacMahon, T. 2010. Cuban era has been anything but boring. ESPN.com. Available at: http://sports.espn.go.com/dallas/columns/story?id=4793301. NBA.com. 2014. Raptors Game Experience FAQs. Available at: http://www.nba.com/raptorsews/gameexp_faq.html). Page 18 of 18