Question
The town of Paisley has received a proposal to build a new multi-purpose outdoor sports stadium. The expected life of the stadium is 20 years
The town of Paisley has received a proposal to build a new multi-purpose outdoor sports stadium. The expected life of the stadium is 20 years and will be financed by a 20-year bond paying 8 percent interest annually. The stadiums primary tenant will be the citys football team, the Cyclones. The plans backers anticipate that the site will also be used for music concerts and university and high school sports. The town does not pay my taxes. Paisleys cost of capital is 8 percent. The estimated costs and revenues follow:
Cash outflows:
Construction costs: $12,000,000
General maintenance (including labor): $250,000 per year
Cash inflows:
Cyclones minimum lease payments: $650,000 per year
Concerts: $600,000 per year
University and high school sports: $50,000 per year
A. Should the town of Paisley build the stadium? (Assume payments are made at the end of the year.)
B. The Cyclones have threatened to move out of Paisley if they do not get a new stadium. The city controller estimated that the move will cost the city $350,000 per year for 10 years in lost taxes, parking revenues, and other fees. Should the town build the stadium now? State your reasoning.
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