The Rovers Football Club are languishing in the middle of the Premier Division of the Football League. The Club have suffered a loss of £200,000 in their last financial year and whilst receipts from spectators have declined over the last five years, recently receipts have stabilised at approximately £1,000,000 per season. The Club is considering the purchase of the services of one of two new football players, Jimmy Jam or Johnny Star.

Jimmy Jam is 21 years old and considered to be a future international footballer. He is prepared to sign a five-year contract with Rovers for a salary of £50,000 per annum. His present club would require a transfer fee of £200,000 for the transfer of his existing contract. With J. Jam in the team the Rovers Club would expect receipts to increase by 20 per cent.

Johnny Star is 32 years old and a leading international footballer who is prepared to sign for Rovers on a two-year contract before retiring completely from football. He would expect a salary of £200,000 per annum and his present club would require a transfer fee of £100,000 for the transfer of his existing contract. Rovers believe that as a result of signing Star receipts would increase by 40 per cent.

The rate of interest applicable to the transaction is 12 per cent and the following is an extract from the present value table for £1:

It should be assumed that all costs are paid and revenues received at the end of each year.

Required:

A report, incorporating an evaluation of the financial result of engaging each player by the net present value method, providing the Rovers Football Club with information to assist it in deciding

which alternative to adopt. Indicate any other factors that may be taken into consideration.

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Year 1 Year 2 Year 3 Year 4 Year 5 12% 0.893 0.797 0.712 0.636 0.567