Cost Benefit Analysis

As with most studies of this type, the outcome may depend upon the assumptions you will make. As you proceed, this problem may require you to make some assumptions or obtain more data that is given below. Please state what assumptions you are making and how, in reality, you might get other information you may need. Part of the evaluation will depend on how well you express your assumptions.

Consider the following proposal to build a stadium in a middle size community. The owners of a minor league team, the Riders of the Purple Sage, have offered to move their team to you city. But they want the city to build a new stadium for them.

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*The team will play 80 home games per year.

* A survey indicated that about 30% of the attendance will come from out of area and about 20% will be female.

* It is expected that the stadium will cause fans to spend about $35 each time they attend a game, including a $1 city tax. The remainder will be spent on food and miscellaneous items.

*Almost all revenues that go to the stadium owners will be spent locally either for expenses or retained as profits to the local owners.

*Local experts believe that for every dollar spent about $.10 of income is created for local residents. Most of the benefit will go directly or indirectly to individuals who are unemployed. (In the long run new families will move to the area and new residents will receive about half of the income generated from the project but this fact should be ignored in your analysis).

*Extra public service costs to the city from servicing the Stadium are estimated at half a million dollars per year.

*The stadium will hold 8000 people. Most similar stadiums with minor league teams average attendance of 6000. Usually attendance is near capacity when the stadium is new (say the first 7 years) and falls to 5000 after 7 years.

*The stadium will last for 35 years after which time it will only be worth the cost of tearing it down.

* The interest rate on long-term government bonds is 4%, reflecting a real rate of interest of 2% a 2% inflation factor, and no risk premium.

*A private group of owners, is going to put up $2,000,000 for the project, but they want the city to provide $12,000,000 in cash assistance.

*The cost of construction is $12,500,000; non-local contractors will do about half of the work. During construction about 200 local residents will be hired and paid about $30,000. The local residents hired will have been previously unemployed.

Prepare a report to the city council to guide them in their decision.