Sporting c ont r act, net p r esent v alue, payback. Aalesund Fotballklubb is a Norwegian football 1 answer below »

Sporting c ont r act, net p r esent v alue, payback.

Aalesund Fotballklubb is a Norwegian football team with a long tradition of winning. However, the last three years have been traumatic. The team has not won a major champi- onship, and attendance at games has dropped considerably. Norsk Fiskevær AS is Aalesund Fotballklubb’s major corporate sponsor. Sverre Aspelund, the president of Norsk Fiskevær, is also the president of Aalesund Fotballklubb. Sverre proposes that the team purchase the services of Brazilian star, Monteiro. Monteiro would create great excitement for Aalesund Fotballklubb’s fans and sponsors. Monteiro’s agent notifies Aspelund that terms for the superstar’s signing with Aalesund Fotballklubb are a bonus of NKr 3 million payable now (start of 2008) plus the following four-year contract (assume all amounts are in millions and are paid at the end of each year):

2009

2010

2011

2012 Salary

Living and other costs NKr 4.5

1.0 NKr 5.0

1.2 NKr 6.0

1.3 NKr 6.5

1.4

Aspelund’s initial reaction is one of horror. As president of Norsk Fiskevær, he has never earned more than NKr 800 000 a year. However, he swallows his pride and decides to exam- ine the expected additions to Aalesund Fotballklubb’s cash inflows if Monteiro is signed for the four-year contract (assume all cash inflows are in millions and are received at the end of each year):

2009

2010

2011

2012 Net gate receiptsNKr 2.0

Corporate sponsorship 3.0 NKr 3.0

3.5 NKr 3.0

4.0 NKr 3.0

4.0

Television royalties 0.0

1.2

1.4

2.0

Merchandise income (net of costs) 0.6

0.6

0.7

0.7

Aspelund believes that a 12% required rate of return is appropriate for investments by

Aalesund Fotballklubb.

Required

1 For Monteiro’s proposed four-year contract, calculate (a) the net present value, and (b)

the payback period.

2 What other factors should Aspelund consider when deciding whether to sign Monteiro the four-year contract?