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The King, a well-known rock band from England, is considering signing a new contract with a U.S agency, according to which it agrees to perform
The "King", a well-known rock band from England, is considering signing a new contract with a U.S agency, according to which it agrees to perform there in the next 6 or 7 years. The band has a contract with "Enfield club" in Liverpool, according to which it performs there each year regularly. For each performance, the band receives $900,000. Should the band sign the contract with the U.S agency, it will need to forgo these revenues and additionally pay the "Enfield club an immediate fine of $1,200,000. To perform in the US, the band will need to add a new drummer. During the last month, the band members went to multiple concerts of other rock bands to search for a new drummer. The cost of the scarch was $400,000. In one of these concerts, they discovered a talented drummer named Chad, who was interested in joining them. Chad demanded a yearly salary of S800,000, and in addition, a new state of the art equipment at a cost of $1,000,000. This equipment will be depreciated over 4 years. At the end of the contract, the band estimates that it will be sold for 5400,000 The expected revenues from the new contract are 54,000,000 for the first year, and are expected to rise by 10% per year. The ongoing operating expenses (which include marketing, food, travel and accommodation) should amount to $2,000,000 per year. In addition, the band's manager demands an increase of his yearly retainer from $300,000 to S400,000 if the band sign the contract. At the end of the contract, the band will need to fly the remaining equipment at a cost of $500,000 Before signing the contract, the band discovered that they could receive a visa to the US for only 6 years. If the band chooses to extend the visas for all the bend members and employees, it will cost $3,000,000. The band's operational tax rate is 30% and their Capital gain tax rate is 20%. The band is profitable and can deduct any expense as a tax shield (having yearly royaltics of $10,000,000 from their previous album). All cash flows are year-end, unless stated otherwisc. The tour's annual discount rate is 15%. a. Should the band sign the contract? b. If the answer to item (a) is yes, for how long
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