Question

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 i. ii.

iii. iv.

v.

The that

just ended tournament. A summary of the clubs and their offers are shown below:

Bologna F.C. based in Italy offers to pay €200,000 every year over the contract period FK Zalgiris based in Lithuania proposes a total package of €1,050,000 at the end of the contract period

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

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.

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.

contract duration for all five clubs is 5years and may be renewed afterwards. Analyst expect 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

A Ghanaian football player has been approached by 5 top football clubs from Europe offering to sign him.

We will evaluate proposal of each club one by one.

Interest rate (given) = 4% p.a.

Club 1- Bologna F.C.

This club promises to give €200000 every year(assuming year end). We will discount all the payments and find the present value of the offer.

Discount factor at year 1 = 1/1.04 = 0.9615

At year 2 =  (1/1.04)^2 = 0.9246 and so on..

PVIF = Caashflow * Discount factor (Column2 * Column3)

Years	Cashflow	Discount factor (4%,n)	PVIF
1	€ 200,000	0.9615	€ 192,308
2	€ 200,000	0.9246	€ 184,911
3	€ 200,000	0.8890	€ 177,799
4	€ 200,000	0.8548	€ 170,961
5	€ 200,000	0.8219	€ 164,385
		Present value=	€ 890,364

Club 2- FK Zalgiris

This club proposes a total package of €1,050,000 at the end of the contract period.

Present value = Cashflow * Discount factor

Cashflow at year 5= €1,050,000 (rest , no other cashflows)

Discount factor = (1/1.04)^5 = 0.8219

Present value = €1,050,000 * 0.8219 = € 863023

Club 3 - Panathinaikos

The club is offering €195,000 every year but payable at the start of each year. This implies payment at beginning of year 2 is as good as payment at the end of year 1 and so on.

Years	Cashflow	Discount factor (4%,n)	PVIF
0	€ 195,000	1	€ 195,000
1	€ 195,000	0.9615	€ 187,500
2	€ 195,000	0.9246	€ 180,288
3	€ 195,000	0.8890	€ 173,354
4	€ 195,000	0.8548	€ 166,687
		Present value =	€ 902,830

Club 4- SC Bastia

This club is offering a total package of €897,000 and the whole amount will be paid to him immediately i.e. now/today.

So Present value= €897,000

Club 5- FC Dynamo Kyiv

This club proposes an annual payment of €32,000 up to a time the player will be tired of receiving the payments, i.e. for an indefinite period.

Present value in case of indefinite period = Annual cashflow/ Interest rate

= €32,000 / 4%  

Present value = €800,000

Summary
Club name	Present value
Bologna F.C.	€ 890,364
FK Zalgiris	€ 863,023
Panathinaikos	€ 902,830
SC Bastia	€ 897,000
FC Dynamo Kyiv	€ 800,000

Based on financial grounds, the player should sign for Panathinaikos based in Greece since present value of the payments by this club is the highest of all i.e. € 902,830.