straight forward net present value and payback computations. basketball player decision

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week 5 additional (problem 8-2): basketball player decision

the phoenix kings of the united basketball league have a moody center by the name of orlando dawkins. dawkins is under contract with the team and is scheduled to earn $650,000 in both 20x3 and 20x4. a $75,000 salary increase will take effect in 20x5.
dawkins has not gotten along with several of his teammates and, as a result, management is exploring the possibility of a trade with the philadelphia rockets to acquire george harper, a star player. the kings would pay the rockets $350,000 immediately for the trade to take place. harper would be paid a $270,000 signing bonus at the beginning of 20x3 that management plans to expense over the next 3 years by using straight-line amortization. harper's annual salary would be $950,000 from 20x3 through 20x5, highest on the team because of his ability to attract fans. the kings expect that increased attendance will produce added annual net cash inflows of $525,000.
phoenix officials believe that both players would play 3 more years for the kings, at which time they would become free agents and move along to other clubs. the kings would receive $380,000 compensation from the other club for dawkins; for harper, the figure would increase to $500,000. regardless of whether the trade takes place, the kings are obligated to pay dawkins $200,000 at the end of 20x4 under the terms of his original contract.
the kings desire a rate of return of 14% and use the net present value method to analyze investments. round all calculations to the nearest dollar, and ignore income taxes.
determine whether the kings should keep dawkins or trade for harper . assume the trade would occur on january 1, 20x3.
future cash flows are, in many cases, subject to change. list several events that could occur that might influence the cash flows in this situation.
(problem 8-3) straight forward net present value and payback computations

the calgary eskimos play in the canadian hockey league. although the eskimos will soon be moving to a modern arena, management is studying the possibility of expanding the team's present facility to accommodate increased crowds. a $2.4 million expansion is planned that has a $200,000 residual value and will be depreciated by the straight-line method over four seasons. information about the expansion follows:

number of seats

occupancy rate

ticket price
class 1 seats



class 2 seats



the team will play 50 home games each season. total added operating costs per game (ushers, cleanup, and depreciation) are expected to average $11,800. all such costs, except depreciation, require cash outlays.
by using the net present value method and a 16% desired rate of return, determine whether the expansion should be undertaken.
in addition to the cash flows presented here, what other cash flows might change if the eskimos add on to the arena?
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