Question

FIFA rules regarding player contracts are very interesting. If a player wishes to break his contract, the purchasing club must pay the player’s club four times the player’s annual salary multiplied by the number of years left on the contract. The player must pay 10% of this amount personally and the agent must also pay 10% of the amount from his own pocket. Consider a footballer who earns £120,000 a week and has 4 years of his contract left. a) Calculate how much the player would personally have to pay if he left his club with 4 years remaining, 3 years remaining, 2 years remaining, and 1 year remaining. b) If the appropriate annualised discount rate is 8%, what is the present value of him breaking his contract with 4, 3, 2, 1 and 0 years remaining? c) Assuming you are the player’s agent and can personally earn £5m today from getting him to sign a pre-contract agreement to join Real Madrid in the future. Calculate the net present value to you if the player left with 4 years remaining, 3 year’s remaining, 2 year’s remaining, and 1 year remaining.

Answer 1

Calculation of player's annual salary = £120,000 * 52 = £6,240,000

a. Amount payable by the player = 10% * (4* Annual salary * No of years left on contract)

No of years left on contract	Annual salary	Amount payable by the player
4	6240000	9984000
3	6240000	7488000
2	6240000	4992000
1	6240000	2496000

b. Calculation of present value

No of years left on contract	Annual salary	Amount payable by the player	PV @ 8%	Present Value
4	6240000	9984000	1	9984000
3	6240000	7488000	0.926	6933888
2	6240000	4992000	0.857	4278144
1	6240000	2496000	0.794	1981824
0	6240000	0	0.735	0

c. Present Value as an agent

Note: The amount paid by agent is same as the player.

No of years left on contract	Annual salary	Amount payable by the agent	PV @ 8%	Present Value	Earnings	Net Present Value
4	6240000	9984000	0.926	9245184	5000000	-4245184
3	6240000	7488000	0.857	6417216	5000000	-1417216
2	6240000	4992000	0.794	3963648	5000000	1036352
1	6240000	2496000	0.735	1834560	5000000	3165440