ABSTRACT
Introduction is chapter focuses on capital budgeting techniques and the bene‰ts and costs of di¦erent types of ‰nancial investments that teams make. Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with a ‰rm’s goal. Almost every ‰rm’s goals, at least in a ‰nancial sense, include the generation of pro‰ts. Capital budgeting typically refers to long-term investments. Although there are myriad ‰nancial decisions that teams constantly make, the focus in this chapter is on the longer term commitments that include the (1) purchase of the franchise, (2) the building of a facility, and (3) investments in players. Managers have to understand critical and fundamental ‰nancial concepts and apply them to these investments. ere are a few ‰nancial concepts that are unique to the sports business, and these also are addressed in this chapter. At the heart of this book is the observation that the sports business has become dominated by large-scale investments in real estate, the media, and entertainment. When this happens, teams become part of a larger conglomerate. ese other investments must be considered when analyzing the ‰nancial returns of team. In a sense, the team is at the center of the conglomerate, but some of the other activities could actually account for more of the pro‰ts produced by the overall set of businesses linked to each other because of the existence of the team. In addition, when a team
378
is involved with the building of a new facility, ownership must estimate the new revenue streams that will be created. ese revenue streams have to increase pro‰ts to the point where the investment in the facility makes ‰nancial sense. If a facility costs too much, a team’s ‰nancial position could, in theory, be stronger in an older facility. In a similar manner, it is important to keep in mind when investing in players the additional revenue that could be raised, and these funds have to exceed the cost of acquiring a new player. A team’s owner and management sta¦ must consider as well the e¦ect a “star” has on the other players on the team. If the star is seen as taking too much of the team’s revenues, jealousies can arise leading to discontent. In terms of owning a team, building a new facility, or signing players, it is essential to assess each investment as it a¦ects an owner’s complete portfolio. At the end of the chapter, is an analysis of the cost of some of these investments using a cost of capital approach.
