The city engineer and economic development directors are evaluating two sites for construction of a multipurpose sports arena. The sites are downtown (DT) and southwest (SW) of the metropolitan area. The city already owns enough land at the DT site; however, the land for a parking garage will cost $1 million, and construction costs will be $10 million for the parking garage, infrastructure relocation, and drainage. The SW site is 30 km from downtown, but the land will be donated by a developer who knows that an arena at this site will dramatically increase the value of the remainder of his land holdings. Because of its centralized location, there will be greater attendance at most of the events held at the DT site. This will result in more revenue to vendors and local merchants in the

Question

amount of $700,000 per year. Additionally, the average attendee will not have to travel as far, resulting in annual benefits of $400,000 per year. All other costs and revenues are expected to be the same at either site. If the city uses a discount rate of 6% per year, and will construct at one site or the other, which site should be selected? Use a 30-year study period.

What will be an ideal response?

Answer 1

DT will have the larger equivalent total costs
PW of ?C for DT = 1 + 10
= $11 million
PW of ?B for DT = (700,000 + 400,000)(P/A,6%,30)
= (700,000 + 400,000)(13.7648)
= $15,141,280

?B/C = 15,141,280/11,000,000
= 1.38 > 1.0
Select the DT site