The Hotshots are a professional hockey team with a long tradition of winning. However, over the past
Question:
The Hotshots are a professional hockey team with a long tradition of winning. However, over the past three years, the team has not won a major championship, and attendance at games has dropped considerably. A large hockey manufacturer is the team’s major corporate sponsor. Carl Cliff, president of the hockey company, is also the president of the Hotshots. Cliff proposes that the team purchase the services of a star player, Bob Jackson. Jackson would create great excitement for Hotshots fans and sponsors.
Jackson’s agent notifies Cliff that terms for the superstar’s signing with the Hotshots are a signing bonus of $8 million payable now and a house in Toronto at a cost of $5 million. The annual salary and cost of living adjustments are under negotiation. Cliff’s initial reaction is one of shock. However, he decides to examine the cash inflows expected if Jackson is signed for a four-year contract. Net gate receipts would most likely increase by $2 million a year, corporate sponsorships would increase $2.5 million per year, television royalties would increase $0.5 million per year, and merchandise income (net of costs) would increase $1 million per year. Cliff believes that a 12% discount rate is appropriate for this investment. The Hotshots’ marginal tax rate is 20%. The signing bonus can be depreciated over the four-year period for income tax purposes, providing an annual tax deduction of $2 million.
Required:
A. Create a timeline that shows the relevant cash flows for this problem.
B. Assuming that he is not willing to lose money on the contract, what is the maximum amount per year that Cliff would be willing to pay Jackson? You will need to set up a spreadsheet for this calculation and through trial and error find an amount that brings the NPV to zero, or you will need to use an algebraic approach and annuity factors.
C. Identify possible additional factors that Cliff should consider when deciding whether to sign Jackson to the four-year contract. List as many factors as you can.
D. For each of the relevant cash flows in this problem, discuss why Cliff cannot be certain about the dollar amount of the cash flow.
AnnuityAn annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
Step by Step Answer:
A Following is the time line incorporating the algebraic approach to the solution Notice that S is used for salary because the problem gives no information about its value Nor does the problem provide ...View the full answer
Cost Management Measuring, Monitoring and Motivating Performance
ISBN: 978-1119185697
3rd Canadian edition
Authors: Leslie G. Eldenburg, Susan K. Wolcott, Liang Hsuan Chen, Gail Cook
