1) With the information in the case, please show a draft for the 2004/2005 season budget. Be aware that the figures in the case do not include the effect of the expected "galactico" acquisition for the 2004/2005 season. When preparing the budget consider the following decisions:

a.- With respect to the policy of new player acquisition Real Madrid is considering two options:

i. Acquiring two megastars at an estimated cost of 40 million each in transfer fees and an annual salary of 10 million, or

ii. Acquiring four rising stars, young players with enormous potential at an estimated cost of 15 million each in transfer fees and an annual salary of 3 million. In this decision please take into account the following considerations:

(1) The new players will most likely affect the sale of team jerseys. New players' names will be popular in the sale of new jerseys.1 However, some of these sales will come at the expense of cannibalizing sales of existing players' jerseys. The marketing department has prepared the following estimation of royalty income from team jerseys as a function of the players acquired and the money invested in equipment advertising:

(2) The acquisition strategy will affect the sport potential of the team. Most sport analysts believe the rising stars strategy will have a more positive impact in the chances of advancing further in the Champions League and winning the Spanish La Liga. The immediate economic implications of sport performance are the following:

(a) Advancing one more round in the Champions League increases Real Madrid's revenue by 5 million partly for additional ticket revenue and partly for increased participation in the UEFA marketing pool. Winning the Champions League only produces a 3.5 million increase over qualifying for the semifinal (as the final is played in a neutral stadium only increases participation in the pool).

(b) Advancing one more round in the Champions League increases salary expenses by 1 million and winning the competition will trigger bonus payments to players for 14 million.