A sports team has a stadium that holds a maximum of 36,000 fans. The league has suggested that the owners of the team consider expanding its seating to 40,000. The cost of permits, project management, and construction is expected to be $40,000 per seat. Work can be accomplished over two years, at which time the club will have 4,000 additional seats to sell. Assume the investment would occur equally over years 0 and 1.

Each seat will generate an additional $3,500 of revenue per year for the first three years after completion, $4,000 per year for the next four years, and $5,000 per year for the next four years, at which time a replacement or major renovation of the park will be necessary.

a. If the cost of capital is 15%, will this project be economically feasible, given the information provided? What is the NPV? IRR?

b. The team has approached city officials to seek a subsidy from the city to guarantee a 10% return on the project. How much would the city have to advance at the beginning to accomplish this?

c. What steps might management consider to make the project more economically attractive? Show your analysis.

Answer rating: 100% (QA)

Given Existing capacity 36000 seats Proposed capacity 40000 seats Increased capacity 40000 36000 4000 seats Cost of the project 400040000 160000000 The cost has been distributed over the two years 50 ... View the full answer