PLEASE DO NOT LINK THE TEXTBOOK SOLUTION. Question 1 Peter Guber and Joe Lacob b

Question

PLEASE DO NOT LINK THE TEXTBOOK SOLUTION.

Question 1 Peter Guber and Joe Lacob bought the Golden State Warriors basketball team for S450 million in 2010. Forbes magazine estimates the team's net income for 2009 was S11..9 million a) If the new owners believed that they would continue to earn this annual profit (after adjusting for inflation), f- S11.9 million, forever, was this investment more lucrative than putting the S450 million in a savings account that pays a real interest rate of 2%? b) Would your answer to the part a) change if the real interest rate is 3%?

Explanation / Answer

(a) Interest rate = 2%

Present worth (PW) of $11.9 million per year in perpetuity = $11.9 million / 0.02 = $595 million

Since PW of the annual net income is higher than $450 million, this investment is more lucrative.

(b) Interest rate = 3%

Present worth (PW) of $11.9 million per year in perpetuity = $11.9 million / 0.03 = $396.67 million

Since PW of the annual net income is lower than $450 million, this investment is less lucrative.

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