Question 2

Formulas for capital investment:

FVn=V0(1 + K)n

PV0= FV1/(1+K)+ FV2/(1+K)2+ .......

Present value of 1 after N years =1/(1+k)n

Present value of an Annuity of 1 received annually for N years =(1/k)(1(1/(1+k)n))

The Barcelona Football Club (BFC) is a team with a long tradition of winning. However, their performance in the last three years has been traumatic. The team has not won any major championship and attendance at games has dropped considerably.

Rakuten is BFC's major corporate sponsor. Mikitani, the president of Rakuten, is also the president of the Barcelona Football Club. Mikitani proposes that the team purchase the services of British star, Gareth Bale. Bale would create excitement for BFC's fans and sponsors.

Bale's agent notifies BFC that terms for the superstar's signing with BFC are a payment of 3 million payable now (start of 2021) plus the following four-year contract (assume all amounts are in millions and are paid at the end of each year):

	2021	2022	2023	2024
Salary	4.5	5	6	6.5
Living and other costs	1	1.2	1.3	1.4

Mikitani's initial reaction is one of horror. As president of Rakuten, he has never earned more than 800,000 a year. However, he swallows his pride and decides to examine the expected additions to BFC's cash inflows if Bale is signed for the four-year contract (assume all cash inflows are in millions and are received at the end of each year).

	2021	2022	2023	2024
Cash receipts	2	3	3	3
Corporate sponsorship	3	3.5	4	4
Television royalties	-	1.2	1.4	2
Merchandise income (net of costs)	0.6	0.6	0.7	0.7

Mikitani believes that a 12% required rate of return is appropriate for investments by BFC.

Required (show your workings for calculations & write in your own words):

(a) For Bale's proposed four-year contract, calculate:

(i) Payback period (2 points)

(ii) Net Present Value (3 points)

(b) Based on your calculation in part (a), is Bale a good purchase for BFC? Why? (2 points)

(c) Suggest three (3) non-financial factors Mikitani should consider when deciding whether to sign Bale the four-year contract. (3 points)