Toledo Stadium

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 stadium's primary tenant will be the city's Triple-A baseball team, the Red Hots. The plan's 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 ciy's cost of capital is 8 percent. The costs and estimated revenues are presented next:

Cash Outflows

Construction costs $12,000,000

General maintenance (including labor) $250,000 per year

Cash Inflows

Red Hots' lease payment $650,000 per year

Concerts $600,000 per year

College and high school sports $50,000 per year

Required:

A. Should the city build the stadium? (Assume payments are made at the end of the year)

B. 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, purking, and other fees. Should the city build the stadium now? State your reasoning.