Mark allocations are shown in brackets.

1.A football club is considering buying a player on 1 January for K5 million.The player's wageswillbeK10,000permonthhigherthanthoseofthemanhewillreplace.The managerexpectsthepurchasetogeneratealevelincreaseinattendances,whichwill yield an extra income in the first year of K50,000 from each home match.The manager also expects the new player to increase the club's chance of reaching the Cup Final in any one year from 5% to 20%.The extra amount generated for club funds by an appearance in a Cup Final on 30 April is K1 million.

The club plays a home match on the second of each month throughout the year, but all Cupmatchesareplayedawayfromhome.Wagesarepaidattheendofeachmonth. Wages, ticket prices and the reward for reaching a Cup Final rise at 3% pa, the incre- ments taking place on 1 January.

Iftheplayerispurchased,thecostwillbeborrowedfromabank,whichwillcharge interest at 1% per month and will accept repayment at any time.The owner of the club insists that any purchase should show a profit if the managers expectation are borne out in practice.

2

(a)Ifthemanagerexpectsthathewillkeeptheplayerfor3 1/2

yearsuntilheretires,

calculatethenetpresentvalueofthecashflow,inordertoassesswhetherornot

the purchase should go ahead.

(b)The purchase goes ahead.Attendances rise as expected, but the club does not reach the Cup Final and 12 months after being bought the player is sold again.The club

owner calculates that he has made a profit of K379,490.Calculate the sale price.