Question
Your company owns a minor league baseball team and is considering building a new stadium. The local governments refuse to help build the stadium, so
Your company owns a minor league baseball team and is considering building a new stadium. The local governments refuse to help build the stadium, so you must fund it yourself. The stadium will cost $20,000,000 and will have a 25-year life span, after which it will be valueless. It will take a year to build, so you cannot use the stadium until the second year. You are planning to finance it with a 5% interest-only loan, which requires that you make interest payments at the end of years one through ten. At the end of year ten, you will also have to make a balloon payment of the $20,000,000 principal. You expect that the operating profit from the new stadium will be $3,000,000 per year from the 2nd year (when the stadium will open) through the 26th year (when it will close). Your company uses a straight-line depreciation method to calculate its annual depreciation expenses for the first 10 years, after which it will be zero. Your tax rate is 25 percent of your taxable profit. Your discount rate is 10 percent. a) Calculate net cash flow per year for 26 years. b) What is the net present value of building the stadium? c) Should your company invest in this project? Why?
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