Comments
If they build the stadium, the city receives all of the inflows from the lease receipts, concerts, and
sports. Those receipts will come in yearly. The cash out is annual cost of maintenance.
Comparing the present value of the net receipts to the $12 million, I imagine that buidling the stadium is
not a good investment. In part A, the present value of benefits falls short of the cost of construction.
Part B., changes things a little. If the city does not build, then there is no construction and no receipt of
benefits, that’s all a net of zero. However, there is an additional side effect of losing $350,000 each year
in taxes, parking, and fees. That loss has a present value as well. So, in part B., we have a possibly
difficult choice. Which decision loses the least in present value? If part A. is a loser and part B., is a
bigger loser, then we choose the least loss.
This is similar to some economic impact statements. They try to identify the immediate impact of
projects, and then identify side effects of projects.
Problem statement
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 city’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 Hot’s lease payments $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? The initial payment of $12 million is immediate. The other
receipts and payments are at the end of each year. Show your computations.
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,
parking, and other fees. Should the city build the stadium now? State your reasoning.
