Capital Project Finance (Term Paper Sample)

Student’s name Instructor’s name Course Date Capital Project: Renovation and Development of Camp Nous Stadium Rationale for the capital project and cost Camp Nou is a Barcelonan, Spain football stadium which was opened in 1957. Since its completion, it has been FC Barcelona’s home stadium. Camp Nou is the largest stadium in Spain with a seating capacity of 99,354 (“FC Barcelona…”). In the world, it is the fourth largest stadium. The capital project entails to expand the Camp Nou stadium by raising its seating capacity from 99, 0000 to 106, 000. The project also entails to change the roofing of the stadium. The renovation will also include upgrading the technologies of WI-FI and improving hospitality services. The development is more focused in improving the quality of the stadium rather than its quantity. Improving the quality of Camp Nou Stadium is associated with a number of positive impacts to the economy of Spain and to the sports fraternity. The change is needed because other stadiums who are in competition with Camp Nou are also renovating their stadiums. There is also the need to expand the stadium to be able to accommodate a large number of fans. This will present the stadiums with increased opportunities of holding larger sports events than its current capacity. Capitalizing the project an determining the cost of capital Capitalization is the capital structure of an organization. It is a company’s sum of stock, long-term debt alongside retained earnings. Capitalization budgeting is the “process of conducting evaluations, comparisons and selections of capital projects that would enable an organization acquire the best return on investment over a certain period of time” (Matthew 245). The process is vital for an organization given that investing in assets or capital can affect an organization’s financial health. For the case of Camp Nou Stadium capital project, the process of capital budgeting involved a number of stems for the cost of capital to be determined. We first determined the initial cost of the project followed by a determination of the incremental cash flow of the project. We then selected the method of capital budgeting and conducted a post-audit analysis. The cost of capital of the project will be 1.5 billion. This cost is inclusive of the initial cost of the project alongside additional expenses. Determining the incremental income Incremental income refers to the cash that is created by implementing a new project. It is the profit gained by a business through the increase of sales. It is comprised ‘of any income from a project that is great as compared to that is currently is existence. Determining incremental income involves a number of steps. While determining the incremental income and expense of the Camp Nou Stadium project, we first calculated the additional net earnings (ANE). With the renovation of the stadium, the annual earnings of the stadium are estimated to increase by 250 million. The ANE is therefore estimated to be 250million. We then calculated the additional tax benefit of depreciation (ADT) which was found to be 0. The incremental income and expense was therefore found by addition the ANE to the ADT. The incremental cash flow is therefore $250 million. Impacts of stadium renovation towards team’s performance By renovating the Camp Nou Stadium will positively influence the performance of FC Barcelona. The players will have access to modern facilities which motivates players to determine focused in their career. The current stadium might hold some sad memories such as instances where the team has lost terribly to another team. These memories are likely to fade off with a renovated stadium since the appearance will have changed and there will be little to be associated with the sad memories that might negatively influence players. With an increased number of seats, the stadium will be able to host a huge number of fans. This implies an increase in the intensity of cheering from the fans. This will increase motivation among players hence positively impacting their performance. Project’s NPV, Payback and IRR The net present value (NPV) of a project is the method of capital budgeting preferred by managers in the evaluation of a project or comparing two or more projects. Most manager prefer the NPV method of capital budgeting because the method “analyses cash flows instead of net earning which is in consistence with the theory of modern finance” (Matthew 254). The NPV method also puts into consideration the time value of money concepts, discounting cash flows by the cost of the project’s capital. It also identifies the projects that have a positive NPV which increases the value of a firm. In the case of Camp Nou Stadium renovation and development, the NPV was acquired by deducting the initial cost of the project from the present value of the future cash flow. The initial cost of the project is 1.5 billion while the present value of the future cash flow is 0.9 billion. The NPV was therefore found to be 0.6 billion. The internal rate of return (IRR) is the term used to describe the discount rate at which the present value of the estimated cash flow from an investment is equal to the initial cost of the investment (Matthew 258). It is the measure of the profitability rate of the project. The IRR of Camp Nou Stadium was found to be 1.8billion. This amount is greater than the cost of capital of the project. Generally, projects with a high IRR as compared to the cost of capital of the project stockholders of a firm are accrued. Accepting a project that has a high IRR than the cost of capital increases the wealth of shareholders. As a result, the Camp Nous Project has the capability of increasing its shareholders with this capital project. Project’s payback refers to the amount of time that is required for a capital invetsmnet to be recovered. The payback period of a project should be less than the erod accepted by an organization for any project to be accepted by an organization. The initial cost of this project was 1.5 Billion while the incremental income was estimated at 250 million for the first year 450 million for the second year, 1 Billion for the third year and 1.55 Billion in the fourth year. The maximum acceptable period of payback in my organization is four years, this implies that the project should be accepted by the organization since the payback time does not exceed the period accepted by our company. Rationale for my choice Choosing the Camp Nou Stadium as the facility for this capital project was motivated by the need of improving the Spain economy through sports. The stadium is the largest in Spain and due to the impact of Covid-19 to the country’s economy it is necessary to look into projects that can positively contribute towards the economy of the country. Renovating the stadium will greatly contribute to the economy of Spain as it will lead to th...