Question 12.8: The owner of a professional rugby union team and football st...
The owner of a professional rugby union team and football stadium is considering renting the facility to a professional soccer team. The soccer team would need the stadium for eight games and would be willing to pay rent of £20,000 per game. The football stadium, which originally cost £20 million to build, can be converted from rugby to soccer and soccer to rugby at a cost of £12,000 per conversion. The cost of cleaning and the maintenance due to each soccer game is estimated to be £5,000 per game. Given the overlap of the rugby and soccer season, the stadium would have to be converted four times each year. Should the owner of the professional rugby union team rent the stadium to the soccer team?
The incremental revenues are (8)(£20,000), or £160,000. The incremental costs are (4 conversions) (£12,000/conversion) + (£5,000/game)(8 games), or £88,000. The incremental revenues are greater than the incremental costs, so the rugby team owner should rent to the soccer team. The cost to build the stadium is sunk and irrelevant to the decision.