Sporting contract, net present value, payback, breakeven time.

(30 minutes) Aalesund Fotballklubb is a Norwegian football team with a long tradition of winning. However, the last 3 years have been traumatic.

The team has not won a major championship, and attendance at games has dropped considerably. Norsk Fiskevzr, AS, is Aalesund Fotballklubb’s Major corporate sponsor. Sverre Aspelund, the president of Norsk Fiskever, is also the president of Aalesund Fotballklubb. Aspelund proposes that the team purchase the services of Brazilian star, Monteiro.

Monteiro would create great excitement for Aalesund Fotballklubb’s fans and sponsors. Monteiro’s agent notifies Aspelund that terms for the superstar’s signing with Aalesund Fotballklubb are a bonus of NKr 3 million payable now (start of 2000) plus the following 4-year contract

(assume all amounts are in millions and are paid at the end of each year): bhy36

REQUIRED 1. For Monteiro’s proposed 4-year contract, calculate

(a) the net present value,

(b) the payback period, and

(c) the breakeven time.
2. What other factors should Aspelund consider when deciding whether to sign Monteiro to the 4-year contract?

Transcribed Image Text:

2002 2003 2004 2005 Salary Living and other costs NKr 4.500 NKr 5.000 NKr 6.000 NK 6.500 1.000 1.200 1.300 1.400 Aspelund's initial reaction is one of horror. As president of Norsk Fiskevr, he has never earned more than NKr 800,000 a year. However, he swallows his pride and decides to examine the expected additions to Aalesund Fotballklubb's cash inflows if Monteiro is signed for the 4-year contract (assume all cash inflows are in millions and are received at the end of each year): 2002 2003 2004 2005 Net gate receipts NKr 2.000 NKr 3.000 NKr 3.000 NKr 3.000 Corporate sponsorship 3.000 3.500 4.000 4.000 Television royalties 0.000 1.200 1.400 2.000 Merchandise income (net of costs) 0.600 0.600 0.700 0.700 Aspelund believes that a 12% required rate of return is appropriate for investments by Aalesund Fotballklubb.