Question

The Montgomery Biscuits recently announced plans to build a new $35,000,000 baseball stadium in Montgomery, Alabama. The Biscuits play in the Southern League and are the Double-A farm club of the Tampa Bay Rays. The operating costs of the new 10,000 seat stadium are expected to average $300,000 per year for the first fifteen years, then they are expected to increase by $20,000 per year for the next ten years, after which they will remain constant throughout the life of the stadium. In addition, to the stadium, The Biscuits plan to construct a Montgomery Baseball Hall of Fame at a cost of $8,000,000 five years from now. The Biscuits’ project engineers estimate the Hall of Fame will have to be renovated every twenty years at a cost of $150,000 beginning fifteen years from now. The Montgomery Biscuits Baseball Club will borrow money to construct the project at a 6% per year interest rate.

a. Compute the capitalized cost component of the operating costs for the stadium.
b. Compute the capitalized cost component of the initial cost of the stadium.
c. Compute the capitalized cost component of the initial cost of the Hall of Fame.
d. Compute the capitalized cost component of the renovation costs of the Hall of Fame.
e. Compute the total capitalized cost of the project.
f. Evan Longoria, formerly of the Tampa Bay Rays, has pledged $15,000,000 to the help offset the cost of the stadium and Hall of Fame. The money will be given to the Montgomery Biscuits Baseball Club four years from now. MBBC plans to increase the cost of admission, concessions, etc. by 3% per year to retire the debt of the stadium and Hall of Fame in thirty years. Compute the amount of money the baseball club must make in the first year of operation in order to pay off the debt in thirty years. Show all of your work.

Answer 1

a. Capitalized cost component of the operating costs for the stadium will be the present value of all the operating costs.

There are two operating costs here.

one is $300,000 per year for the first fifteen years and second is $20,000 per year incremental for next ten years

Capitalized cost for first 15 years =

where PMT = Each annuity amount = $300,000

r = interest rate = 6%

n = time period = 15 years

Capitalized cost for first 15 years = 300,000 (1-(1/(1+0.06)¹⁵))/0.06

                                                     = $2,900,000

Capitalized cost for next 10 years= (P)/ (g-r)*[1-((1+r)/(1+g))ⁿ]

Where P = First Payment = $300,000

r = interest rate = 6%

g= growth rate = 15%

n= time period = 10 years

Capitalized cost for next 10 years = (300,000)/ (0.15-0.06)*[1-((1+0.06)/(1+0.15))¹⁰]

                                                                          =$1,866,666.67

So Total Capitalized cost component of the operating costs = $2,900,000 + $1,866,666.67

  =$4,766,666.67

b. Capitalized cost component of the initial cost of the stadium = $35,000,000

c. Capitalized cost component of the initial cost of the Hall of Fame = P / (1+r)ⁿ

where P is First Payment = $8,000,000

r = interest rate = 6%

n = time period = 5 years

So Capitalized cost component of the initial cost of the Hall of Fame = 8,000,000/(1+0.06)⁵

                                                                                                            =$5,979073.24

d. Capitalized cost component of the renovation costs of the Hall of Fame= P / (1+r)ⁿ

where P is First Payment = $150,000

r = interest rate = 6%

n = time period = 15 years

So Capitalized cost component of renovation costs of the Hall of Fame = 150,000/(1+0.06)¹⁵

                                                                                                                  = $62,500

e. Total capitalized cost of the project = a + b + c + d

                                                            = $4,766,666.67 + $35,000,000 + $5,979073.24 + $62,500

                                                            = $45,808,239.9