BUSN3640 Business Analysis Tools
Assessment 4: Individual Project
You have been contracted by the owners of Craven Cottage, a football stadium located in Fulham, West London, to help in the initial planning phases for the demolition and development of the Riverside Stand. Over the past two decades, attendance has been steadily growing to the point that the current stadium will soon no longer be large enough to meet projected ticket sales. In light of this, the owners of Craven Cottage and Fulham FC (i.e., your clients) are considering plans to redevelop one (the Riverside Stand) of the four stands at the stadium. The new stand is expected to increase the seating capacity at the stadium. Currently, the capacity of the stadium is 29,000, of which, the riverside stand makes up 3,000 seats. The owners would like to continue hosting matches whilst work on the Riverside Stand is in progress. Therefore, the ground’s capacity will reduce to around 19,000, and supporters will be accommodated in the Hammersmith End, Putney End and Johnny Haynes Stands. Your task is to provide recommendations concerning the optimal size of the new Riverside Stand.
You have been provided an Excel file (called Ticket Sales.xlsx available on Moodle) showing the forecast for average number of tickets per game that could potentially be sold from 2021 to 2040.
The demolition and building of the new stand will incur a fixed cost of £55 million. The fixed cost includes the construction of 3,000 seats (a minimum requirement), restaurants, meeting facilities, and bars. The owners have the option of further increasing the capacity. For every additional 1,000 seats, the variable cost is £3 million (e.g., a 7,000 seat stand would cost £67 million). The maximum allowable capacity of the new stand is 10,000 seats. Your clients have informed you that they are planning to draft a contract stipulating that 30% of the project’s costs must be paid the day building works start (1 July 2021). A further 10% will be payable when work is completed (1 April 2023, just in time for the 2023 season). The remaining costs need to be paid in equal monthly payments at the end of each month during construction.
Your clients have two options to consider:
1. Not to build the new Riverside Stand. In this case, it is assumed that the average price of a ticket is £30. For each ticket sold, it is expected that an additional £15 in concessions will also be earned from the purchase of food, drinks and memorabilia. The price of tickets and value of concessions are both expected to increase by 2% per year.
2. To build the new Riverside Stand. In this case, the ticket + concession prices will continue to increase by 2% whilst the stadium is being built. Prices will increase by 25% in the year immediately after the completion of the new stand, and continue increasing by 2% in subsequent years. 2
In all, the stadium hosts 72 matches in a year, played from April through November. For simplicity, you can assume that games are spread evenly over the 8-month season (i.e., 9 games per month).
Your clients would like you to investigate the net present value of the projected cash-flow stream from the start of building in 2021 till the end of 2040. For accounting purposes, cash flows are assumed to occur at the end of each month. The discount rate is estimated at 15% per year compounded monthly. It has not been determined exactly how big the new stand should be. Rather, the recommended size, and hence the projected cash-flow stream, will depend on the cost and projected revenue from ticket sales and concessions. Consequently, in carrying out your financial analysis, you should be able to make recommendations to your clients regarding the optimal size of the new stand based on net present value. Additionally, you may want to investigate how uncertainty regarding the discount rate may affect optimal sizing of the new stand and associated cash-flow streams.
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