Question

QUESTION 2

A Ghanaian football player has recently been approached by 5 top football clubs from Europe offering to sign him on. All five clubs are offering enticing packages to this youngster who excelled in a just ended tournament. A summary of the clubs and their offers are shown below:

i. Bologna F.C. based in Italy offers to pay €200,000 every year over the contract period

ii. FK Zalgiris based in Lithuania proposes a total package of €1,050,000 at the end of the contract period

iii. Panathinaikos based in Greece is offering €195,000 every year but payable at the start of each year.

iv. SC Bastia based in France is also offering a total package of €897,000. Although this is the total contract value over the 5-year period, the club manager however, added that if the player signs for SC Bastia, the whole amount will be paid to him immediately.

v. FC Dynamo Kyiv based in Ukraine proposes an annual payment of €32,000. The club adds that the player will be entitled to this package even after the contract period up to a time the player will be tired of receiving the payments.

The contract duration for all five clubs is 5years and may be renewed afterwards. Analyst expect that interest rate will be relatively stable and will average at 4% p.a throughout the contract period. Other political, economic and environmental risk factors are assumed to be relative stable across the EU region.

Required:

You have just been appointed as a financial consulted by the management team of this player. As part of your first meeting with the management team, you are to present a report explaining the financial implications of the various offers and advise them which club the player should sign for based on financial grounds. Include all necessary calculation as part of your report.

Answer 1

We need to find Net present value of each scenario and whichever scenario has the highest NPV, that option should be selected.

Scenario 1: npv calculated by NPV formula in excel using 4% as discount rate.

Scenario 1	Bologna FC
Years	0	1	2	3	4	5
Payments	0	200000	200000	200000	200000	200000
NPV	$890,364.47

Scenario 2: Present value of payment in 5th year calculated in excel using 4% as discount rate.

NPV= 1050000/(1+.04)^5 =863023.46

Scenario 2	FK Zalgiris
Years	0	1	2	3	4	5
initial cost	0	0	0	0	0	1050000
NPV	$863,023.46

Scenario 3: npv calculated by NPV formula in excel using 4% as discount rate.

Scenario 3	Panathinaikos
Years	0	1	2	3	4	5
Payments	195000	195000	195000	195000	195000
NPV	$902,829.57

Scenario 4: All payments done in the intial year. hence payment same as npv

Scenario 4	SC Bastia
Years	0	1	2	3	4	5
Payments	897000
NPV	$897,000.00

Scenario 5: Calculated based on present value of perpetuity formula = 32000/.04

Scenario 5	SC Bastia
Years	0	1	2	3	4	5
Payments	32000	32000	32000	32000	32000	32000	To infinity
NPV	$800,000.00

Conclusion:

Hence by finding out NPV of all the scenarios we can see that Scenario 3 in which club Panathinakos paying 195000 annualy at the start of each year is giving highest npv and the player hence should choose this option.