Question: After the arrival of Jim Harbaugh, Michigan football tickets are in high demand. To help accommodate more fans in the Big House (and earn some extra cash for athletic scholarships), the University of Michigan is considering a project to increase the capacity of the Michigan football stadium by building a new VIP section. This will require 3 annual investments of $6 million, the first of which will be made at the end of year 1 (i.e., exactly one year from now), and the second and third investments will be made at the end of years 2 and 3, respectively.
The new section, which will commence operations in year 5, will seat 1, 500 people and have infinite life. The stadium will host 8 games per year, and the ticket prices will increase by 3% each year. For simplicity, assume that the stadium will always operate at full capacity, that there are no taxes or additional maintenance expenditures, and that all cash inflows occur at the end of each year (e.g., the first cash inflow from the new section will occur at the end of year 5). The annual discount rate is 11%.
You are asked to compute the minimum price per ticket in the new section that you can charge when the section opens in year 5 to satisfy the University's financial objective. The University's objective is to ensure that the present value of all cash inflows from the project over its infinite life exceeds the present value of all cash outflows by at least $1 million.