ECON7740 Cost Benefit Analysis & Project Evaluation

Semester 1, 2024

Individual Case Study - Sport Facilities

ALL SECTIONS DUE, 3pm 3rd June. Submitted online.

Instructions:

This assignment will consist of a CBA task worth 30% (spreadsheet and report) and a reflective writing worth 10% for a total of 40% of your final grade.

The assignment must be submitted electronically through the Online Submission links in the Assessment section of the Course Blackboard site.

• Part 1 MUST be submitted as an Excel file (.xls or .xlsx)

• Part 2 MUST be submitted as a Word file (.doc or docx)

• Part 3 MUST be submitted as a Word file (.doc or .docx)

Further details to be announced on Blackboard.

Remember that each value should be entered into the spreadsheet only once.

Marked out of 80 points (weighted to 40% of your final grade).

Background:

As local councils realise the growing importance of sustainable community spaces, there has been an increasing emphasis on providing more projects to support healthy activities of constituents in their areas. This includes making sure there are good facilities for sports and exercise, which helps keep people healthy and brings communities together.

A local council is considering the re-development of a sporting facility in one of their suburbs. The facility currently hosts a single cricket ground. The re-developed community space will add facilities including a soccer field, a cricket net, and a basketball court. To assist in evaluating the investment, the council has asked you to provide a cost-benefit analysis (CBA) to determine the feasibility of the project. As part of this analysis, the council would like you to examining the potential costs involved in building and maintaining the sports facility, as well as the expected benefits to the community. Additionally, the CBA should consider aspects that may align the proposed sports facility aligns with broader sustainability goals and regulations.

The sporting facility is expected to be operational by the start of 2025 and will operate for 20 years. The initial capital investment is scheduled for 2024, with additional purchases required in 2025. In your report to the council, you will need to discuss the results from the Investor, Social, and Disaggregated analyses. You will also need to consider any relevant literature or reports on the evaluation of the external benefits of sports participation as part of a program to support the local government and community.

Part 1- Spreadsheet Task - 30 marks (15%)

[Use the template Excel File on the BB website]

a)    Market and Investor Analysis

Construction requires a new basketball court,a cricket net, and a soccer field. The initial investment in these new facilities is expected to begin in 2024. Before the re-development, the council deems it necessary to seek legal advice. Legal experts will be consulted in relation to the plans for the project to ensure compliance with all relevant laws, regulations, and contractual obligations. This legal consultation is expected to cost $80,000.

To support the re-development of the site, the council will need to invest in critical amenities. Specifically, the council will need to purchase two storage facilities at a cost of $45,000 each. A new restroom and change room facility will need to be built at a cost of $125,000. A new lighting system will need to be installed to support after hours participation at a cost of $179,000. The current carpark will not be sufficient to support the increased traffic to the site. There is expected a one-off parking lot re-development expense of $300,000.

To equip the upcoming sporting facilities, the council is set to acquire 25,200 square meters of turf, designated for the soccer field and cricket net. This procurement entails a rate of $12.50 per square meter. Further, the soccer field will need four goals posts to be purchased and installed at an expected cost of $750 per goalpost. The council will also purchase a single cricket net and pitch for installation at an expected cost of $1,600.

The council plans to offer a range of products and services catering to the needs of athletes, spectators, and community members. As such it will need to purchase a demountable building to be used as a concession stand at a cost of $67,000.

Further to this, the council will need to purchase the following items in 2025:

-      One complete set of maintenance tools to assist in the upkeep of the site at a total cost of $3,000.

-      A worksite vehicle at the cost of $75,000.

-     Two ride-on lawnmowers at $5,600 each.

-      200 litres of fuel at $2.30 per litre to initially fuel the worksite vehicle and the lawn mowers.

-      150 kilograms of fertiliser at $19.00 per kilogram.

As part of the project, the council will need to invest in working capital in 2026 to assist in maintenance of the facilities. The working capital items have been provided in Table 1.

Table 1: Working Capital

In addition to the working capital, the council expects the following operating costs:

Table 2: Operating Costs

Further to the information above, it is expected that due to wear and tear 10% of the turf installed as part of the project will need to be replaced every year and the facility will have a yearly administration cost of $9,600.

The local council owns some of the land around the existing cricket ground. However, it will also need to lease additional land to hold temporary buildings for the life of the project. This land is not viable for other development uses and consequently the council can rent the land from the owner for $200 per hectare required. The council will rent a full 900 hectares every year from the owner. The land for this project will be rented from the owner for a 50-year period, at which point the council will take ownership of the land.

For the upkeep of the facility, the council’s expected wage expenses include:

-      One groundskeeper with a salary of $85,000 per year.

-      Two casual workers who are expected to work 30 days of the year (each), on average. Each day of casual labour is expected to cost $200 per worker.

Insurance premiums to cover liability, property damage, and other perceivable risks of the facility. 2.5% of

total fixed investment, this includes the additional investment in 2025.

The expected revenue for this project consists of multiple aspects:

1)   The concession stand  brings  in $2.50 for every dollar spent on concession inventories on average every year.

2)   The facility is expected to be  hired out approximately  10 times a year by local community groups. The council expects to charge $5,000 for each rental hire.

3)   Community  sports  groups  for   organised  sporting  events  are  expected  to   occur  every  week. Approximately 500 participants use the fields to participate in organised sport events at the venue every week. Each participant is expected to pay a nominal fee of $5 per community event to support the upkeep of the sporting grounds and facilities.

The final revenue stream comes from major events. The council expects two major events per year – one for the basketball community and one for the soccer community. The council believes these events have the potential to benefit, with an estimated revenue at full capacity of $300,000.

To finance the initial investment costs, the council will takeout a loan of $500,000 at an interest rate of 4.5% per annum. The loan will have a 10-year term starting from 2025. Additionally, in 2027 the council will take out an offset loan of $100,000 as a contingency for any unexpected costs. This loan will have a term of 4 years with repayments starting in 2028 and an interest rate of 9.5% per annum. Both loans are from foreign banks.

For depreciation purposes, only the following assets are eligible to be depreciated:

Table 3: Depreciation

Note that all assets are depreciated starting in 2025 with the exception of the worksite vehicles. As worksite vehicles are purchased in 2025, depreciation must begin in 2026. Other assets purchased as part of the initial capital investment are not eligible for depreciation.

The tax rate on profits is 30%. Assume the salvage value for all investment costs is 10% of the initial fixed investment cost plus 10% of the additional investment cost (for capital purchased in year 2025).

The re-development of the sporting facility will affect the capacity for operation for the first three years. Assume that the project is expected to reach 50% capacity in 2025, 80% capacity in 2026, and full capacity in 2027 for operating capacity.

Using a conversion factor of  10,000  and  the  information  above,  you  have  been  asked  to  calculate the following:

i)    The IRR and NPV for the Market Analysis at a 5%, 10% and 15% real discount rate.

ii)   The IRR on equity and NPV for the business at a 5%, 10% and 15% real discount rate for the Investor Analysis.

b) Social Analysis

You now need to consider the social CBA. Due to taxes, duties, and subsidies we are required to calculate the relevant shadow prices for the following:

Table 4: Taxes and Subsidies *remember that duties are only paid once.

Further to the information in Table 4, the council is receiving a subsidy from the State government for this project to support the development of sporting facilities prior to the 2032 Olympics. It is expected that the State government will provide a 20% subsidy for the Parking Lot Re-Development. The State government will also provide a subsidy of 25% for the repairs and maintenance to ensure the facilities are kept clean and usable.

It is also noted that land has an opportunity cost of $0 and the opportunity cost of labour is 60% of the market wage for casual workers. The groundskeeper is employed from elsewhere and should be costed at the market wage.

To estimate the external benefits of the re-furbished sporting facility you consider the following benefits:

1)   You reference a recent research paper indicates that for each large, organised community sport event held at the  re-furbished facility is expected to increase  the output of the local Food  and Beverage industry by 11 cents and the output of local Accommodation industry by 15.5 cents per dollar received from the event revenue.

2)   The Australian Institute of Health and Welfare (AIHW) estimated that sport and physical activity had a net positive impact of $321 million on the health system for the entire Australian population in 2018-19 (25 million population). The council estimates that  10,000  different participants will  be engaged in sport and physical activity at full capacity annually.

i)            Building on the spreadsheet completed in a), calculate the NPV and IRR of the Social Cost Benefit Analysis using a 5%, 10% and 15% discount rate.

c)    Disaggregated Social Analysis

Now you want to disaggregate the results of the analysis. In this case you would like to evaluate who gains and who loses from the project. As part of the approach to disaggregation you are asked to exclude the private investor and the foreign bank from the Total Disaggregated CBA, and then identify the remaining stakeholders withstanding. The remaining stakeholders include landowners, local labour, local communities, and the government. Using the template identify:

i)            The  NPV for the total disaggregated group of interest (without the investor and foreign bank) using a 5%, 10% and 15% discount rate.

ii)           The NPV for each remaining stakeholder group using a 5%, 10% and 15% discount rate.

d) Sensitivity Analysis

Nowas part of the cost-benefit analysis, the local council is interested in evaluating the assumptions and how sensitive or insensitive the results are to the best guess inputs. Specifically, the council would like to answer the following questions:

i)            There are two key inputs that are uncertain for the revenue expected to be generated by there- developed facility – the rental income and the usage fees. As the council has some ability to set the price, they would like to see how the NPV changes for the investor analysis at the 5% discount rate. Allow the facility rental income to vary by $1000 from the best guess and the usage fee to vary by $1 from the best guess. Comment on the result.

ii)           The council would like to achieve an NPV of zero at a 5% discount rate as the investor to minimise running costs. Use the “Goal Seek” command to identify the minimum usage fee the facility could charge.

Part 2 - Written Report Task - 30 marks (15%)

Using your results from Part 1 of the case study, write a comprehensive report analysing the results of your CBA. In your report ensure you:

1)    Provide professional recommendations to the council on whether it should implement the re- development project. You are expected to research relevant literature of community sport.

2)   Outline the approach and results of sections a) tod) in Part 1. In your response you should investigate which variables should be subject to a partial sensitivity analysis in addition to the results of d).

3)    Identify considerations for your analysis or any alternative approaches that would improve on the current format of the CBA.

Word limit 1,500 words (+/- 10 %).

The rubric for this component of the case study can be found on the course website.

Part 3 - Reflective Assessment Task - 20 marks (10%)

Critically reflect on the CBA task from the Individual Case Study and Pitch Deck Group assessments. In your answer,

1)   determine and establish the relevance and authenticity of the case study task as part of your development in a professional context.

2)    how did you integrate the feedback provided by the Industry Expert in Week 13 into your approach for this CBA assessment?

Word limit 750 words.

The rubric for this component of the case study can be found on the course website.