Reference no: EM13572334

The Phoenix Kings of the United Basketball League have a moody center by the name of Orlando Dawkins. Dawkins is under contract with the team and is scheduled to earn $650,000 in both 20X3 and 20X4. A $75,000 salary increase will take effect in 20X5.

Dawkins has not gotten along with several of his teammates and, as a result, management is exploring the possibility of a trade with the Philadelphia Rockets to acquire George Harper, a star player. The Kings would pay the Rockets $350,000 immediately for the trade to take place. Harper would be paid a $270,000 signing bonus at the beginning of 20X3 that management plans to expense over the next 3 years by using straight-line amortization. Harper's annual salary would be $950,000 from 20X3 through 20X5, highest on the team because of his ability to attract fans. The Kings expect that increased attendance will produce added annual net cash inflows of $525,000.

Phoenix officials believe that both players would play 3 more years for the Kings, at which time they would become free agents and move along to other clubs. The Kings would receive $380,000 compensation from the other club for Dawkins; for Harper, the figure would increase to $500,000. Regardless of whether the trade takes place, the Kings are obligated to pay Dawkins $200,000 at the end of 20X4 under the terms of his original contract.

The Kings desire a rate of return of 14% and use the net present value method to analyze investments. Round all calculations to the nearest dollar, and ignore income taxes.