Evaluating an investment proposal under uncertainty serge martin, general manager of the hapless Hogtown flyers, is considering the acquisition of Mario Flanagan to bolster his teams sagging fortunes. Mario has played the last two seasons in Europe, so there would be no compensation paid to another team if he is hired. Mario, a prolific soccer, is holding out for a 10-year contract with contract demands of (1) an immediate and one-time payment of $200m000 as a signing bonus, and (2) $1,000,000 in salary in the first year. Mario is demanding that his salary increase at the rate of 10% each year. Serge figures that hiring Mario will increase ticket sales by $35,000 per year. Tickets sell for $20 per game, and total variable costs associated with each customer per game are about $5. In addition, Serge in certain that with Mario, the Flyers will get into the playoffs each year. Getting into the playoffs means sales of at least 50,000 playoff tickets, which sell for $30 each. The variable cost associated with each playoff ticket is about $5. Because the Flyers have the highest ticket prices in the league and would operate at capacity if Mario were signed, Serge does not expect these numbers to change over the life of Marios contract. Serges only concern is that Mario is demanding a guaranteed contract- that is, he will be paid whether he plays or not. Serge is virtually certain that Mario will play for 7 years. However, he is uncertain of the possibilities after that but certain that ticket sales will revert to their current levels whenever Mario stops playing. Assume all cash flows except the singing bonus occurs at the end of the year.

Prepare a 10-year statement of expected cash flows associated with this opportunity.

Assume the Flyers after-tax cost capital is 6%. Compute the net present value of his deal if Mario plays for 7 years, 8 years, 9 years, and 10 years. Assume that the Hogtown Flyers face a marginal tax rate of 40% and that any losses on the sports operations can be used to reduce the taxes on other operations

What would you advise Serge to do?