Question

A football club is considering buying a player on 1st January for $ 20 million The player;s wages will be $ 15,000.00 per month higher than those of 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 $ 90,000.00 from each home match. 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 the club funds by appearance in ac up final on 30 April is $ 1 million.

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

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 manger;s expectations 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 Net Present Value of the cash flows, 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 being bought the player is sold again. The club owner calculates that he has made a profit of $ 979,490.00. Calculate the Sale Price.

Answer 1

a) The calculation for NPV are given below

Based on these calculations, the club should not buy the player as it has a negative NPV of $55,153,834

Note: No discount rate was given to calculate present value, The wages, attendance income and interest expenses are accounted for half year in the last year. The interest of 2% per month seems unusually high.

With Excel Formulas shown:

b) The calculation of sale price is given below :

The sale price of the player is $24,879,490