Question
The city of Toledo has received a proposal to build a new multipurpose outdoor sports stadium. The expected life of the stadium is 20 years.
The city of Toledo has received a proposal to build a new multipurpose outdoor sports stadium. The expected life of the stadium is 20 years. It will be financed by a 20-year bond paying 8 percent interest annually. The stadiums primary tenant will be the citys Triple-A baseball team, the Red Hots. The plans backers anticipate that the site also will be used for rock concerts and college and high school sports. The city does not pay any taxes. The citys cost of capital is 8 percent.
Should the city build the stadium? (Assume payments are made at the end of the year.)
The Red Hots have threatened to move out of Toledo if they do not get a new stadium. The city comptroller estimates that the move will cost the city $350,000 per year for 10 years in lost taxes, parking, and other fees. Should the stadium build the stadium given those circumstances?
| Toledo Stadium | |||||
| Annual Cash Flows/Net Present Value | |||||
| Cash Outflows: | |||||
| Maintenance | -250,000 | ||||
| Cash Inflows: | |||||
| Lease Payments | 650,000 | ||||
| Concerts | 600,000 | ||||
| Other Sports Eevents | 50,000 | ||||
| Annual Net Cash Flows | 1,050,000 | ||||
| *Annuity Factor | 9.818 | ||||
| Less: Original Outlay (annual net cash flow8annuity) | 10308900 | ||||
| Net Present Value | 12,000,000 | ||||
| -1,691,100 | |||||
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