P. 17-7

Capital expenditures cannot be assessed in isolation of operating expenditures.

A city is weighing the costs and benefits of a new conven- tion center. The center would be accounted for in an enter- prise fund. It would cost $20 million and would be funded from the proceeds of 20-year revenue bonds. Officials esti- mate that the center would generate $3.5 million each year in rental and other fees and would cost $1.6 million (excluding interest) to operate.

Based on this limited amount of information, should the city construct the convention center? Assume that the term of the bonds is indicative of the centers use- ful life and that the citys cost of capital is 6 percent.

Suppose that city officials estimate that the center would generate an additional $150,000 in general sales taxes and $200,000 in hotel occupancy taxes that are dedicated to promotion of tourism. However, the center would cost the city an additional $250,000 to provide police, fire, and other services in connection with center events. Further, the city utility depart- ment (accounted for in an enterprise fund) would have to extend utility lines to the center at an initial cost of $1.7 million and would have to incur annual costs of $50,000 to maintain and repair these lines. None of these operating and utility costs would be charged to the convention center. Taking into account these costs and revenues, should the city construct the convention center?

Assuming that the city were to construct the conven- tion center, what would be the annual impact on rev- enues and expenses/expenditures (excluding interest and other financing costs) of the following funds?

a. Convention center fund b. General fund c. Hotel occupancy tax fund d. Utility fund