5. The Charlotte Bobcats, a professional basketball team, has been offered the o

Question

5. The Charlotte Bobcats, a professional basketball team, has been offered the opportunity to purchase the contract of an aging superstar basketball player from another team. The general manager of the Bobcats wants to analyze the offer as a capital budgeting problem. The Bobcats would have to pay the other team $800,000 to obtain the superstar. Being somewhat old, the basketball player is expected to be able to play for only four more years. The general manager figures that attendance, and hence revenues, would increase substantially if the Bobcats obtained the superstar. He estimates the incremental returns (additional ticket revenues less the superstar

Explanation / Answer

A)NPV = 800,000 - [450,000- 0.4 x(450,000-200,000)]/(1+0.12)1

- [350,000- 0.4 x(350,000-200,000)]/(1+0.12)2

- [275,000- 0.4 x(275,000-200,000)]/(1+0.12)3

- [200,000- 0.4 x(200,000-200,000)]/(1+0.12)4

NPV = 45,320

IRR = 14.9336%

as NPV >0 Bobcats should sign the superstars

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