Aalesund Fotballklubb is a Norwegian professional football team with a long tradition of winning. However, the last three years have been traumatic. The team has not won a major championship, and attendance at games has dropped considerably. The president of the football club proposes that the team purchases the services of Brazilian star, Monteiro. Monteiro would create great excitement for the club’s fans and sponsors. Monteiro’s agent notifies the president that terms for the superstar’s signing with Aalesund Fotballklubb are a bonus of NOK 3 million payable now (start of 2011) plus the following four-year contract (assume all amounts are in millions and are paid at the end of the each year): The president believes that a 12 % required rate of return is appropriate for investments by the football club.
2012 2013 2014 2015
Salary (in NOKs) 4.5 5.0 6.0 6.5
Living and other costs 1.0 1.2 1.3 1.4
The president’s initial reaction is one of horror. He has never earned more than NOK 800 000 a year personally. However, he swallows his pride and decides to examine the expected additions to Aalesund’s cash inflows if Monteiro is signed for the four-year contract (assume all cash inflows are in millions of NOK and are received at the end of teach year):
2012 2013 2014 2015
Net gate receipts 2.0 3.0 3.0 3.0
Corporate sponsorship 3.0 3.5 4.0 4.0
Television royalties 0.0 1.2 1.4 2.0
Merchandise income* 0.6 0.6 0.7 0.7
* Net of costs
For Monteiro’s proposed four-year contract:
a) Calculate the net present value.
b) Calculate the payback period.
c) What other factors should the president consider when deciding whether to sign Monteiro the four-year contract?