Question

A footballer 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:

1. A.C. Milan based in Italy offers to pay €200,000 every year over the contract period
2. Chelsea F.C. based in England proposes a total package of €1,050,000 at the end of the contract period
3. F.C. Barcelona based in Spain is offering €195,000 every year but payable at the start of each year.
4. 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.
5. FC Augsburg based in Germany proposes an annual payment of €35,000. 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 7% per annum throughout the contract period. Other political, economic and environmental risk factors are assumed to be relative stable across the European 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

Based on the given data, pls find below workings, steps and answers:

- Based on the given rate of interest, have calculated the Present Value (PV) of all the options; Based on this, the option of SC Bastia seems value as compared to other options, with highest NPV;

- The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;