Investment Efficiency Calculation – Methodology (Part I)

October 2, 2022 0 Comments

1. Introduction

The analyzed undertaking called Improvement of the sports infrastructure through the reconstruction of the Stadium in RZESZOW consists of carrying out the first stage of reconstruction of the Stadium located in Rzeszow at 69 Hetmanska Street, currently ceded by the Communal City of Rzeszow to the Institutional Sports Club Stal Rzeszow. As part of the investment, nine stadium segments (stands) are planned to be built in the current facilities on the east side of the stadium along with access roads. The realization of only nine segments (not the entire stadium) is conditioned by the financial possibilities of the City, as well as the accessible allocation of means as part of the Subcarpathian Voivodeship Regional Operation Program (RPO WP). The new stands will allow the capacity of the stadium to be increased by some 4,711 seats for spectators of sports competitions. After the completion of the investment, the capacity of the stadium will increase to 14,211. The completion of the project will also increase the level of driving safety and comfort, as well as participation in sports games and competitions, adapt the facility to the needs of the people with disabilities, improve the image of the city, rationalize the operating costs of the facility. The improvement of the sports infrastructure of the stadium in Rzeszow is strictly related to the conception of the reconstruction of the swimming pool in the “Karpik” housing estate in the south of Krakow, which will be enriched with a competitive trough for diving in the Olympic class together with a platform ten meter dive. A common part of both tasks is the prospect of creating in Rzeszow a supra-regional center for various sports disciplines, especially in the branches that require intensification and assumption with a sports sponsorship of the sections under their charge, demonstrating the best results in competitions both in internships domestic and foreign. The speed racing section in Rzeszow, the diving section of the ZKS Club, as well as the “Sokol” swimming club proved many times that investing in young talent results in effective promotion of the city as a major professional sports center. and qualified. The STAL Rzeszow Institutional Sports Club will be responsible for the exploitation of the fixed assets established as part of the project.

2. Methodology and methods used
Investment expenses in the realization of the project were received on the basis of estimated cost calculations in the range of investment tasks (initial pricing of the Speedway football stadium in Rzeszow on the basis of the headwork green friendly project), calculations of the beneficiary and the contract with the executors of the feasibility study. Total gross investment expenses comprised in the sum of 30,000,000 Polish money.

Based on the assumptions presented below, the Stadium operator’s financial plan was drawn up for the activity directly related to its use. The plan includes the operator’s balance sheet, especially its essential positions to prepare the demand on net working capital, the profit and loss account and the money flow account. The most important assumptions of the forecast are presented below.

The income acquired by the project operator comes from three sources: income from the sale of tickets for sporting events and other events organized at the Stadium; income from advertising placed in the Stadium buildings and income from the organization of various events at the Stadium. Due to the small size of revenue from hosting events, this revenue was aggregated with revenue from advertising sales. The income generated by the operator for the management of the Stadium in the years 2005-2007.

The construction of any ticket demand model that authorizes participation in events organized in the Stadium facilities would be burdened with the risk of reaching a level that casts doubt on the practical usefulness of such models. The price elasticity of demand for tickets is minimal. The income projections prepared are therefore based on the assumption of proportional growth in income from ticket sales due to the increase in seats in the stands. The number of seats will increase by 50%. The average level of ticket prices, according to the forecast, will not change, so the annual revenue from ticket sales in the reference period will increase by about 150%. The forecast also includes proportional growth in advertising revenue. Because ticket sales revenues in recent years were characterized by significant fluctuations, the weighted average of revenues in particular years was accepted as input for the forecast objective. However, the arithmetic mean of the years 2005-2007 was accepted for revenue from advertising sales.

Both the analysis of the historical data and the cost projections are based on distinguishing the costs related to the activity carried out with the use of the Stadium’s facilities from among all the costs incurred by the operator. Indirect costs were allocated based on their estimated share of revenue in particular years.
The forecast of particular types of costs was drawn up on the basis of the division into constant and variable. The costs recognized as variable (or predominantly variable) were expected in a certain proportion to the expected change in the number of places in the stands. In addition, instructions from technical experts on the scale of growth of particular costs as a result of the commissioning of new objects.

The realization of the commitment will not directly cause significant changes in the generic structure of the running costs of the Stadium. The essential abrupt growth in costs will occur in 2011 as a result of the putting into use of new objects. The detailed assumptions of the anticipated costs are presented below.
In the years 2005-2007, the costs of materials and energy constituted an average of 14.5% of the total operating costs of the Stadium, excluding depreciation. Both material costs and energy costs were recognized as variable cost positions, although their degree of reaction to the increase in places on the stands is small.

In the years 2005-2007, external services constituted an average of 18% of the total operating costs of the Stadium, excluding amortization. These costs include the costs of current repairs, protection services, telecommunications services, transportation of impurities. Outside services were included in variable costs. It was assumed that the coefficient of increase in the costs of external services constitutes a % of the rate of increase in the number of seats in the stands.

The installations that made up the composition of the Stadium used by the operator in 2007 were fully remitted. However, the property is still used in operator business and was never formally closed. For this reason, the basis for making copies of amortization is the value of the investment expenses increased with the gross value of the existing buildings, fully remitted. Based on the records kept by the operator and in accordance with the regulations of the law on income tax of legal entities, the amortization rate in the amount of 2.5% was accepted for the Stadium buildings.

The average annual share of remuneration and derivatives in unamortized operating costs was 56% in the years 2005-2007. The project meant maintaining the current employment situation and the level of remuneration. The derivatives that had the character of “mark-ups” on remunerations were directly related to most of the remuneration budget. Due to this fact, both cost positions were integrated in the analysis.

Due to the insignificant amount of taxes and payments, they were added in the remaining generic costs position. In the years 2005-2007, taxes and payments constituted an average of 11.9% of the Company’s total costs. The remaining costs include training costs, business trips, performances and advertisements, insurance. Their average annual share of unamortized costs in the years 2005-2007 was 10%.

The financial results of the forecast operator on the activity related to the operation of the Stadium were included in the profit and loss account. Both in the variant before the completion of the project and in the variant after the completion of the project, Stadium achieves a positive result in the sale. The essential increase in costs in effect of making copies of amortization of the investment made in the nature of friendly modernization with the environment is balanced by a significant increase in income from ticket sales.

Distinguishing the income and costs related to the operation of the Stadium among all the economic transactions of the operator and the analysis of the profitability of the activity so distinguished justifies the correction of the result on the operational activity of the project on the sum of the profitable tax. In accordance with the provisions of article no. 17 of the 5th law on the tax on the profits of legal entities, the profits of taxpayers that are sports clubs, as defined in the law of July 29, 2005 on qualified sport in the part oriented to training and sports competition for children and young people, are tax-free. Based on analysis of historical data, it was assumed in the forecast to allocate 75% of profits to children’s training and competition. Throughout the forecast period, the assumed rate of income tax for legal entities is 19%.

In recent years, the trader has shown relatively small stock statements, overdue and short-term obligations. It is also opportune to highlight its gradual decrease in the analyzed period, reflecting the rationality in the management of circulating capital. The projection is based on the calculation of the average circulatory coefficient for the years 2005-2007 and aims to maintain this coefficient in the coming years.

In the “with project” variant, it was assumed that the reconstructed expenses would be incurred each year, starting from the year in which the amortization of the investment made would begin to be made. It was accepted that the rebuilt costs in the “without project” variant grow around 3% per year, which means that it will be necessary to increase the annual rebuilt costs as the installation wears out. The rate of increase of the reconstructed expenses in the variant “with the project” is also 3% per year. The amount of reconstructed expenditures in the base year for the variant “without the project” was established based on the analysis of historical data. The reconstructed expenses rise in accordance with the instructions of the technical expert and assigning to the reconstructed investments 10% of the amortization copy already in the first year of the economic use of the investment made. Such assumption is suitable for the exercise of the activity of subjects controlled by public bodies or that act in the public sector that usually condition the amount of the investment expenses to the amortization of the copies.

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