You are the Director for a popular youth sports complex in your city. Your complex is able to host a variety of youth sport tournaments including baseball, softball, basketball, soccer, volleyball, lacrosse, cheerleading, and others due to the amenities it offers. The Covid-19 pandemic, however, significantly impacted your operations as you were unable to host tournaments for an entire year. Needless to say, your operating revenue decreased significantly. In an effort to increase revenues, you’ve decided to sell a title sponsorship for all the scoreboards in your complex. To ensure a long-term stream of income, you have decided to only accept sponsorship deals that span ten (10) years at a minimum. After receiving multiple offers, you narrow the deals down to three finalists:
B&B Enterprise, a commercial real estate development company, offers to pay $17,500 every year for ten years.
Garrity Motors, the top-grossing car dealership in the area, offers to pay $15,000 the first year and an additional 5% each year thereafter. This means that in Year 1, you receive $15,000. In Year 2, you receive a 5% increase from the Year 1 payment. In Year 3, you receive a 5% increase from the Year 2 payment… and in Year 10, you receive a 5% increase from the Year 9 payment.
Pyramid Industries, a local appliance and electronics stores, offers to pay $10,000 the first year and and an additional 12% each year thereafter. This means that in Year 1, you receive $10,000. In Year 2, you receive a 12% increase from the Year 1 payment. In Year 3, you receive a 12% increase from the Year 2 payment… and in Year 10, you receive a 12% increase from the Year 9 payment.
Based on the above, answer the following questions:
What is the total nominal/face value of each sponsorship offer? In other words, without taking into account time value of money, how much will you receive from each sponsorship at the end of ten years?
Since we know that money has time value, selecting a sponsor based on the nominal/face value is not financially optimal. Instead, to make the most financially optimal decision me must find the total present value for each sponsorship proposal, with the highest total being the most financially optimal decision. What is the total present value of each sponsorship using a 6% discount rate?
Using the 5% discount rate, which sponsorship should you choose? That is, which sponsorship has the highest total present value when a 6% discount rate is used?
Now, assume a 10% discount rate. What is the total present value of each sponsorship using a 10% discount rate.
Using the 10% discount rate, which sponsorship should you choose? That is, which sponsorship has the highest total present value when a 10% discount rate is used?
What other factors besides time value of money should you consider when selecting the title sponsor for the scoreboards?
Note:
You do not need to write an essay for this case study. Instead, you can answer each question one at a time. You are free to use any method to calculate your present values, including the present value interest factor method, the Excel/spreadsheet method, a financial calculator, or the present value formula.
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