Question
In: Accounting
The city of Miami has received a proposal to build a new multipurpose outdoor sports stadium....
The city of Miami 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 industrial development bond that will require a payment of 8 percent interest annually. The stadium’s primary tenant will be the city’s Triple-A baseball team, the Mudhawks.
The plan’s backers anticipate that the new facility will also be used for rock concerts and college and high school sports events. The city does not pay any taxes. The city’s cost of capital is 8 percent. The costs and estimated revenues generated from the facility 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 for the city to build the new stadium under the assumption that the Mudhawks will not leave if the city does not build the new stadium? State your reasoning (Assume payments are made at the end of the year.) |
|
b. |
Scenario B – Assume now that the Mudhawks have threatened 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 other fees. Should the city build the stadium now? State your reasoning. |
Solutions
ekkarill92 answered 10 months agoRelated Solutions
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