After their recent almost-victory, the Cleveland Browns are looking to build a consulting company that can teach other NFL teams the intricacies of giving up 14 points in less than 60 seconds a remarkable feat that takes advanced communication so that the whole defense quits in perfect harmony.

They will establish the Seriously?OnlyInTheCLE! Inc. (SOCLE) to provide these consulting services. Like every good business venture, SOCLE is going to require upfront investments to get off the ground and a solid brand ambassador. SOCLE is looking into hiring the universally beloved Tom Brady as the face of the organization for their Lose Like a Winner campaign. Obviously, Tom doesnt come cheap. For four years (seasons) of part-time work, Tom will charge $1.5 million per season. Additionally, hiring Tom will require a personal assistant ($ 120,000 per season), an assistant to the personal assistant ($90,000 per season), and buying and maintaining a Learjet ($250,000 per season). Tom also demands a signing bonus of $800,000. Half of that bonus must be paid up front, the remaining half at the end of Season 3 of the contract.

SOCLE has commissioned the services of DubiousHaslam! Inc. (DUH!) to map out the cash flows for the next four seasons that they can expect from the investment. DUH! charges $950,000 (to be paid up-front) to conduct market research by calling other NFL owners. DUH! has come up with the estimates in Table 1 for the after-tax cash flows for the next 4 seasons. SOCLE discounts cash flows at 17%.

Season 1 $800,000

Season 2 $1,900,000

Season 3 $3,500,000

Season 4 $3,000,000

a) Calculate NPV. Will your accounting department approve of this investment?

b) A recent projection update by DUH! indicates that SOCLE can build a brand for the Browns that can be sold for $1,500,000 at the end of the campaign in Season 4. Calculate the updated NPV. Will your accounting department approve of this investment?

c) Rather than having to buy the Learjet up front, SOCLE is now exploring the option of leasing the jet. Costs will be $850,000 for all four seasons that have to be split evenly over the four seasons and paid out of the cash flows. Calculate the updated NPV. Will your accounting department approve of this investment?

d) After all of the recent changes, SOCLE is wondering what the Internal Rate of Return (IRR) is for the investment. You recently received a note from upstairs that no projects below an IRR of 30% would be approved. Calculate IRR. Will your accounting department approve of this investment?

e) Briefly explain the idea of the NPV. Then, answer the following questions: a. Why are we discounting cashflows? b. What issues do you see with the NPV concept? c. Should we approve projects with a negative NPV? Why/Why not? d. What can we do to make projects viable where the numbers do not work out? e. What is the IRR?