Reference no: EM13220155

the charlotte bobcat's a professional basketball team has been offered the opportunity to purchase the contract of an aging superstar basketball player from another team.The general manager of the bobcats wants to analyze the offer as a capital budgeting problem. the bobcats would have to pay the other team $800,000 to obtain the superstar. being somewhat old, the basketball player is expected to be able to play for only four more years. The general manager figures that attendance and hence revenues would increase substantially if the bobcats obtained the superstar. he estimates that incremential returns(addtional ticket revenues less the superstars salary) would be as follows over the four year period:

year------------------------------------------------incremental returns

1 ----------------------------------------------------- $450,000

2 ----------------------------------------------------- $ 350,000

3 ---------------------------------------------------- $ 275,000

4 --------------------------------------------------- $ 200,000

The general manager has been told by the owner of the team that any capital expenditures must yield at least 12 percent after taxes. the firms(marginal) income tax rate is 40 percent. furthermore a check of the tax regulations indicates that the team can depreciate the $800,000 initial expenditure over the four year period.

a. calculate the internal rate of return and the net present value to determine the desireability of this investment.

b. should the bobcats sign the superstar?