Chesterfield Wanderers is a professional football club that has enjoyed considerable success in recent years. As a result, the club has accumulated £10 million to spend on its further development. This year (Year 0), the board of directors is considering the following investment opportunity:

The club has an option to improve the ground facilities of its football stadium. The west stand could be extended and executive boxes could be built for businesses wishing to offer corporate hospitality to clients. These improvements would cost £5 million and would take one year to complete. During this period, the west stand would be closed, resulting in a reduction in gate receipts of £2 million. However, gate receipts for each of the following four years would be £3 million higher than current receipts. In five years’ time, the club has plans to sell the existing grounds and to move to a new stadium nearby. Improving the ground facilities is not expected to affect the ground’s value when it comes to be sold. Payment for the improvements will be made when the work is completed at the end of the next year. Regardless of the board of directors’ decision about this investment opportunity, the club has also decided to hire more employees to provide a wider range of service to the club fans. The additional wages bill is expected to be £500,000 per year over the next five years.

The club has a cost of capital of 10%. Ignore taxation.

1. ) Calculate considering those 500,000 wages in the NPV calculations?

2.) Explain these relevant or irrelevant cost?

 

 

Answer rating: 100% (QA)

Lets tackle the first question 1 Calculate considering those 500000 wages in the NPV calculations Net Present Value NPV calculation is used to determi... View the full answer