The city of Miami has received a proposal to build a newmultipurpose outdoor sports stadium. The expected life of thestadium is 20 years. It will be financed by a 20-year industrialdevelopment bond that will require a payment of 8 percent interestannually. The stadium’s primary tenant will be the city’s Triple-Abaseball team, the Mudhawks.
The plan’s backers anticipate that the new facility will also beused for rock concerts and college and high school sports events.The city does not pay any taxes. The city’s cost of capital is 8percent. The costs and estimated revenues generated from thefacility are presented as follows:
Cash Outflows | |
Construction costs | $12,000,000 |
General maintenance (including labor) | $250,000 per year |
Cash Inflows | |
Mudhawks’ lease payment | $650,000 per year |
Concerts | $600,000 per year |
College and high school sports | $50,000 per year |
Required:
a. | Scenario A - Determine if it is advisable forthe city to build the new stadium under the assumption that theMudhawks will not leave if the city does not build the new stadium?State your reasoning (Assume payments are made at the end of theyear.) |
b. | Scenario B – Assume now that the Mudhawks havethreatened to move out of Miami if they do not get a new stadium.The city controller estimates that the move will cost the city$350,000 per year for 10 years in lost taxes, parking, and otherfees. Should the city build the stadium now? State yourreasoning. |
