A football team is considering signing a star quarterback to $8 million per year

Question

A football team is considering signing a star quarterback to $8 million per year for a total of 4 years with an initial signing bonus of $1.2 million. (The signing bonus is paid immediately.) The team charges $120 per ticket. How many additional tickets would the team need to sell each year in order for the rate of return on the signing to equal 18.1%? For the cash flow in years 1-4, you can assume that the revenues and expenses occur at the end of each year. You should also assume the team sells the same number of tickets in years 1-4.

Explanation / Answer

let x be number of tickets sold

revenue = x * 120

cash flow per year = x*120 - 8 million

=>

so at 18.1% NPV will be zero

=>

0 = -1200000 + (x*120 - 8000000)*[1/(1+18.1%) + 1/(1+18.1%)^2 + 1/(1+18.1%)^3 + 1/(1+18.1%)^4]

1200000 = (x*120 - 8000000) * 2.68483902578

=>

number of tickets per year x = 70391.29

= 70391 tickets

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