Reference no: EM132803380

1. A football club is considering buying a player on 1 January for K20 million. The player's wages will be K15,000 per month higher than those of the man he will replace. The manager expects the purchase to generate a level increase in attendances, which will yield an extra income in the first year of K90,000 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 club funds by an appearance in a Cup Final on 30 April is K1 million.

The club plays a home match 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 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 managers expectation are borne out in practice.

(a) If the manager expects that he will keep the player for 9 1 2 years until he retires, calculate the net present value of the cashflow, 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 K979,490. Calculate the sale price.