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The professional football club, Highbury Academicals, is considering acquiring a highly successful German international footballer. The transfer fee will be 42m, half of which is

The professional football club, Highbury Academicals, is considering acquiring a highly successful German international footballer. The transfer fee will be 42m, half of which is payable immediately and the other half payable in one year's time. His annual salary during his 4-year contract will be 15.5 million. At the end of his contract, the player will have no resale value to the club. The club's sponsor has agreed to increase the annual sponsorship fee from 4m to 16m, payable in advance. Annual income from gate money is expected to rise by 6m in year 1 and increase by 10% each year, thereafter. Merchandising income, from the sale of club shirts emblazoned with the player's name is expected to be 1m in year 1, rising by 5% each year. The player has a poor injury record and the club will pay an initial insurance premium of 10% of the transfer fee, payable in advance to protect the club against the risk of his contract coming to an early end as a result of this problem. As a consequence of this transfer, the club will be able to loan two other players to an inferior team, elsewhere in north London, thereby making annual salary savings of 9 million.

Assume that all transactions are in cash and arise at the end of the year concerned except where indicated above. The company's cost of capital is 12%.

Required:

(a)Calculate the Net Present Value (NPV) of this acquisition.

(b)Calculate the Accounting Rate of Return (ARR) using the average investment method and assuming the company uses the straight line basis of depreciation .

(c)Advise the company's directors whether or not they should proceed with this acquisition, giving the reasons for your recommendation.

(d)What other facts should be taken into consideration in a decision of this nature?

(e)The company's financial advisor has suggested that instead of buying the player outright and in the two instalments referred to above, that instead, the player is acquired by the payment of 4 equal annual payments. At what annual cost payment would the club be indifferent between the original payment of 42 million in two instalments and:

(i) four equal annual instalments, payable annually, the first instalment to be paid in one year?

(ii) four equal annual instalments, payable annually, the first instalment being paid immediately?

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