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 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 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

This involves analysing the Present values of the different packages ---so as to see which club offers the largest amount

at an interest rate of 4% p.a. for 5 years

Bologna F.C. based in Italy

Present value at time, t=0 of the package=Present value of the annuity of $ 200000 at end of every year for 5 yrs. At 4% p.a.----using PV of ordinary annuity formula,

PVOA=Annuity amt.*(1-(1+r)^-n)/r   & filling up the above values,

ie. 200000*(1-1.04^-5)/0.04=

890364.47

FK Zalgiris based in Lithuania

Present value at time, t=0 of the package=Present value of the package of €1,050,000 at the end of the contract period, ie. At end yr.5 at 4% p.a.

ie. PV of a single sum at end yr.5 at 4% p.a.interest rate

PV= Future Value/(1+r)^n & filling up the above values,

ie. 1050000/1.04^5=

863023.46

Panathinaikos based in Greece

Present value at time, t=0 of the package=Present value of beginning-of-year annuities of 195000 for 5 yrs. At 4% p.a.

so, it is a PV of annuity due----

PVAdue=Annuity amt.*(1-(1+r)^-n)/r*(1+r)     & filling up the above values,

ie. PV=(195000*(1-1.04^-5)/0.04)*1.04=

902829.57

SC Bastia based in France

offering a total package of €897,000 , full amt. at time, t=0, ie.immediately

so, the package=

897000

FC Dynamo Kyiv based in Ukraine

proposes an annual payment of €32,000, on a forever basis

so, the PV will be Next cash flow/interest rate

ie. PV of perpetuity= CF1/r

ie. 32000/4%=

800000

Summary
Offer	Present Values
Bologna F.C. based in Italy	890364.47
FK Zalgiris based in Lithuania	863023.46
Panathinaikos based in Greece	902829.57
SC Bastia based in France	897000
FC Dynamo Kyiv based in Ukraine	800000

From the above workings, it can be recommended that the player should sign for Panathinaikos based in Greece   based on financial grounds---as it offers the maximum package of   902829.57 , in terms of present values of money.