The second option is for the club to improve its ground facilities. The west stand could be extended and executive boxes could be built for businesses wishing to offer corporate hospitality to clients. These improvements would also cost £10m and would take one year to complete.

During this period, the west stand would be closed, resulting in a reduction of gate receipts of £1.8m. However, gate receipts for each of the following four years would be £4.4m higher than current receipts. In five years’ time, the club has plans to sell the existing grounds and to move to a new stadium nearby. Improving the ground facilities is not expected to affect the ground’s value when it comes to be sold. Payment for the improvements will be made when the work has been completed at the end of the first year. Whichever option is chosen, the board of directors has decided to take on additional ground staff. The additional wages bill is expected to be £350,000 a year over the next five years.

The club has a cost of capital of 10 per cent. Ignore taxation.

Required:

(a) Calculate the incremental cash flows arising from each of the options available to the club.