A football club is considering buying a player on 1 January for USD 20 million. The player's wages will be USD 15,000 per month higher than the man he will replace. The manager  expects the purchase to generate a level increase in attendance which will yield an extra income in the first year of USD 90,000 from home matches. The manager also expects the new player to increase the club's chance of reaching the Cup Final in any one year from 6% to 25%. The extra amount generated for club funds by an appearance in a cup final on 30 April is USD 1 million.

The club plays a home on the second of each month throughout the year, but all cup matches are played away from home. Wages are paid at the end of each month . Wages, ticket prices and the reward for reaching a Cup final rise at 4% pa, the increment taking place on 1January.

If the player is purchased , the cost will be borrowed from a bank, which will charge interest at 2% per month and will accept repayment at any time. The owner of the club insists that any purchase should show a profit if the managers expectation are borne out in practice.

(a) If the manager expects that he will keep the player for 9.5 years until he retires. Calculate the NPV of the cash flow , in order to assess whether or not the purchase should go ahead

(b) The purchase goes ahead. Attendances rise as expected, but the club does not reach the Cup final and 12 months after been bought the player is sold again. The club owner calculates that he has made a profit of USD 979,490. Calculate the sale price.

Answer rating: 100% (QA)

Answer Discount Factor 4 All Amount Calculation Of Net present Value NPV Year 0 Year 1 Year 2 Year 3 ... View the full answer