Question

You are the owner of a professional soccer team. You are approached by a broadcasting company with a proposal that would offer you a guaranteed $200,000/year for the next 5 years. You also believe that the increase in exposure will raise merchandise revenues by $10,000 per year. Your current contract also runs for the next 5 years and is paying you only $130,000/year. Buying out of your current contract would cost you $350,000, but the new company is offering you a $100,000 bonus if you sign. You have a discount rate of 11%. Calculate the NPV and discounted payback period of signing this new contract. Would you sign or not?

Answer 1

Year	New	Old	Net	DCF
0	100,000	-350,000	-250,000	-250,000
1	210,000	-130,000	80,000	72,072
2	210,000	-130,000	80,000	64,930
3	210,000	-130,000	80,000	58,495
4	210,000	-130,000	80,000	52,698
5	210,000	-130,000	80,000	47,476
		NPV	$45,672
		Disc PBP	4.04

Calculate the net cash flow if you sign up for the new contract.

DCF = CF / (1 + r)^n

NPV = Sum of DCF

Discounted cash flow is the no. of years it takes to recover the investment using discounted cash flows. We see that in year 4 we recover the investment.

You should sign it.