Chapter $8$ Capital Budgeting

Case Analysis

$267$

Athens City Pool

The residents of the Athens Arts, Parks, and Recreation District suffered from a significant deficiency in swimming opportunities. The Arts, Parks, and Recreation District serves a community of just over $23,800$ people in the center of rural southeast Ohio. The original "city pool," which opened in $1972,$ was declared obsolete in $2002$ and was expensive to maintain and upgrade $($Morris$,2014).$ The city pool was a lap pool, though not many people actually swam laps in it$.$

As a result of the aging pool's condition, the Arts, Parks, and Recreation APR$)$ Advisory Board, together with APR Department Director Rich Campitelli, recommended that a tax levy set to expire in $2016$ be extended to fund construction of a new pool for the city during the summer of $2014.$ They also decided that a recreation pool should be constructed. Such a pool would offer a superior recreational experience compared to a traditional six$-$ to eight lane pool. This pool would be able to compete with newer seasonal recreation pools in the neighboring towns of Nelsonville and Marietta. In Nelsonville, a new swimming pool with slides, diving boards, lap lanes, and a gradual$-$entry shallow end opened in $2004,$ and soon thereafter Marietta opened an aquatic center with a lazy river, slides, a splash pad, and an interactive pirate ship $($Schaller$,2010).$The desire for a recreation pool was also economic. Experience with leisure pools in other parts of the country suggested it was probable that revenues from such a facility would at least equal operational costs and prob ably exceed them. Thus, instead of losing $$40,000$ a year $($as was currently happening$),$ the new pool would likely produce a surplus.

To determine cost and attendance projections, the Athens Arts, Parks, and Recreation District hired a consulting firm that specialized in recreational pool facilities. Their preliminary feasibility study determined that the total develop ment cost of the pool project would be $$6\mathrm{.}6$ million and that the facility would have a $30-$year useful life. The consultants estimated initial annual operation and maintenance costs to be $$212,000,$ rising at $3\mathrm{.}2\%$ annually. The uniqueness of the facility led the consultants to project substantial local and regional $(50$ mile radius$)$ demand, with annual attendance ranging from a conservative estimate of $80,000$ to an optimistic $250,000$ users each year, of which half would be children. The consultants suggested an admission price of $$6$ for adults and $$4\mathrm{.}50$ for children, with increases of $25\%$ every ten years. The study implied that the pool would be profitable but did not provide a detailed pro forma analysis.

The Athens City Council agreed that changes to the city pool were needed and placed the issue on the ballot for vote. An extension of the $0\mathrm{.}1\%$ ARP income tax in the city of Athens was approved by $68\%$ of voters on November $4,2014.$ The current rate for a $30-$year general obligation bond was $3\mathrm{.}5\%$ MTB Inc., a South Carolina$-$based sport consulting firm, was hired to ana

lyze the capital expenses for the new project to determine if the current pool

proposal was feasible from an economic standpoint.

$1.$ Based on the facts presented, does the project "make sense"? Be sure to calculate NPV$,$ IRR, or MIRR when asnwering this question. Assume a $30-$year useful life for the facility.

$2.$ Based on your analysis in question $1,$ would you recommend any changes to the proposed venue? Why or why not?

$3.$ Based on your answers in questions $1$ and $2,$ why do you think the city built the pool $($which opened in $2018)?$