San Diego Padres: PETCO Park as a Catalyst for Urban Redevelopment Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for San Diego Padres: PETCO Park as a Catalyst for Urban Redevelopment case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. San Diego Padres: PETCO Park as a Catalyst for Urban Redevelopment case study is a Harvard Business School (HBR) case study written by George Foster, Antonio Davila, David W. Hoyt. The San Diego Padres: PETCO Park as a Catalyst for Urban Redevelopment (referred as “Padres Diego” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Value proposition, .

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of San Diego Padres: PETCO Park as a Catalyst for Urban Redevelopment Case Study

In 1994, John Moores purchased the San Diego Padres baseball team. The team shared Qualcomm Stadium with the San Diego Chargers football team, which was the senior tenant and received a far higher share of stadium revenue than the Padres. As a result, the Padres' ability to support the payroll needed to field a competitive team was severely limited. The solution was to build a new ballpark for the Padres in a blighted area of downtown San Diego. Redevelopment of the blighted area was integrated into the ballpark construction project, with the Padres owner having the responsibility of being the master developer, and for guaranteeing increased tax revenues from the redevelopment. Typically, sports team owners had sought public funding of their new stadiums, promoting this with the expectation that the new stadium would catalyze other development-an expectation that was often not met. The San Diego Padres ballpark, PETCO Park, was the first integrated sports facility/redevelopment project ever attempted. In the end, the City of San Diego paid $301 million of the $474 million cost for the ballpark. By 2007 (three years after the ballpark opened), redevelopment projects worth approximately $4.25 billion had been completed, were underway, or were planned. Of these, $4 billion was privately funded. The previously blighted area was well on its way to a dramatic redevelopment. While the project turned out to be a huge success for the Padres, the City of San Diego, and the taxpayers of the City, there were, however, many obstacles that had to be overcome, including a 16 month halt in construction. The case describes the project, the role of the Padres, the City of San Diego, and other players.

Case Authors : George Foster, Antonio Davila, David W. Hoyt

Topic : Leadership & Managing People

Related Areas :

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Calculating Net Present Value (NPV) at 6% for San Diego Padres: PETCO Park as a Catalyst for Urban Redevelopment Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10018010)	-10018010	-	-
Year 1	3466386	-6551624	3466386	0.9434	3270175
Year 2	3972986	-2578638	7439372	0.89	3535943
Year 3	3946446	1367808	11385818	0.8396	3313512
Year 4	3248720	4616528	14634538	0.7921	2573291
TOTAL			14634538		12692922

The Net Present Value at 6% discount rate is 2674912

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Profitability Index
2. Net Present Value
3. Payback Period
4. Internal Rate of Return

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Timing of the expected cash flows – stockholders of Padres Diego have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.
2. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Padres Diego shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of San Diego Padres: PETCO Park as a Catalyst for Urban Redevelopment

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Leadership & Managing People Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Padres Diego often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Padres Diego needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10018010)	-10018010	-	-
Year 1	3466386	-6551624	3466386	0.8696	3014249
Year 2	3972986	-2578638	7439372	0.7561	3004148
Year 3	3946446	1367808	11385818	0.6575	2594852
Year 4	3248720	4616528	14634538	0.5718	1857466
TOTAL					10470715

The Net NPV after 4 years is 452705

(10470715 - 10018010 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10018010)	-10018010	-	-
Year 1	3466386	-6551624	3466386	0.8333	2888655
Year 2	3972986	-2578638	7439372	0.6944	2759018
Year 3	3946446	1367808	11385818	0.5787	2283823
Year 4	3248720	4616528	14634538	0.4823	1566705
TOTAL					9498201

The Net NPV after 4 years is -519809

At 20% discount rate the NPV is negative (9498201 - 10018010 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Padres Diego to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Padres Diego has a NPV value higher than Zero then finance managers at Padres Diego can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Padres Diego, then the stock price of the Padres Diego should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Padres Diego should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What can impact the cash flow of the project.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of San Diego Padres: PETCO Park as a Catalyst for Urban Redevelopment

References & Further Readings

George Foster, Antonio Davila, David W. Hoyt (2018), "San Diego Padres: PETCO Park as a Catalyst for Urban Redevelopment Harvard Business Review Case Study. Published by HBR Publications.