A public-private partnership has been formed be­tween a city, county, and construction/manage­ment company to attract a professional athletic team to the area. Assume you are the engineer with the company and are assisting with the benefit/cost analysis. The primary options are to construct a domed arena (DA) or a conventional stadium (CS), one of which will definitely be built. The DA op­tion will cost $200 million to construct, have a use­ful life of 50 years, and require M&O costs of $360,000 the first year, increasing by $10,000 per year thereafter. In 25 years, a remodeling expendi­ture of $4,800,000 is predicted. The CS option will cost only $50 million to con­struct, have a useful life of 50 years, and require M&O costs of $175,000 the first year, increasing by $8000 per

Question

year. Periodic costs for repainting and resurfacing for the stadium are estimated at $100,000 every 10 years, except in year 50. Revenue from DA is expected to be greater than that from CS by $10,900,000 the first year, with amounts increasing by $200,000 per year through year 15. Thereafter, the extra revenue from the dome is expected to remain constant at $13.7 million per year. Assuming that both structures will have a salvage value of $5 million, use an interest rate of 8% per year and a B/C analysis to determine which structure should be built. Solve by hand or spread­sheet, as instructed.

What will be an ideal response?

Answer 1

DN is not an option; compare DA vs. CS; use PW values

By hand: (Note: Omit equal salvage values from both computations)

PWDA = 200,000,000 + 360,000(P/A,8%,50) + 10,000(P/G,8%,50)
+ 4,800,000(P/F,8%,25)
= 200,000,000 + 360,000(12.2335) + 10,000(139.5928) + 4,800,000(0.1460)
= $206,500,788

PWCS = 50,000,000 + 175,000(P/A,8%,50) + 8000(P/G,8%,50) + 100,000[(P/F,8%,10)
+ (P/F,8%,20) + (P/F,8%,30) + (P/F,8%,40)]
= 50,000,000 + 175,000(12.2335) + 8000(139.5928) +100,000[(0.4632) + (0.2145)
+ (0.0994) + (0.0460)]
= $53,339,915

Domed arena (DA) has a larger total cost; compare DA vs. CS

?C = 206,500,788 - 53,339,915 = $153,160,873

PW of ?B = 10,900,000(P/A,8%,15) + 200,000(P/G,8%,15)
+ 13,700,000(P/A,8%,35)(P/F,8%,15)
= 10,900,000(8.5595) + 200,000(47.8857) + 13,700,000(11.6546)(0.3152)
= $153,203,050

?B/?C = 153,203,050/153,160,873
= 1.00

Select Domed Arena (very marginal decision)