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 $800,000 to obtain the superstar. Being somewhat old, the basketball player is expected to be able to play for only four more years. The general manager figures that attendance, and hence revenues, would increase substantially if the Bobcats obtained the superstar. He estimates that incremental returns (additional ticket revenues less the superstar’s salary) would be as follows over the four-year period: Year Incremental Returns Net Cash Flow Interest Factor at 12% Present Value (PV) ($) ($) ($) 1 450,000 ? 0.89286 ? 2 350,000 ? 0.79719 ? 3 275,000 ? 0.71178 ? 4 200,000 ? 0.63552 ? Total Present Value ? The general manager has been told by the owners of the team that any capital expenditures must yield at least 12 percent after taxes. The firm’s (marginal) income tax rate is 40 percent. Furthermore, a check of the tax regulations indicates that the team can depreciate the $800,000 initial expenditure over the four-year period. Complete the preceding table to compute the total present value, discounted at the firm’s cost of capital, of the stream of net cash flows from the investment. What is the net present value (NPV) of cash flows for this investment? Should the Bobcats sign the superstar? Yes, or No?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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 that incremental returns (additional ticket revenues less the superstar’s salary) would be as follows over the four-year period:

Year	Incremental Returns	Net Cash Flow	Interest Factor at 12%	Present Value (PV)
($)	($)	($)
1	450,000	?	0.89286	?
2	350,000	?	0.79719	?
3	275,000	?	0.71178	?
4	200,000	?	0.63552	?
			Total Present Value	?

The general manager has been told by the owners of the team that any capital expenditures must yield at least 12 percent after taxes. The firm’s (marginal) income tax rate is 40 percent. Furthermore, a check of the tax regulations indicates that the team can depreciate the $800,000 initial expenditure over the four-year period.

Complete the preceding table to compute the total present value, discounted at the firm’s cost of capital, of the stream of net cash flows from the investment.

What is the net present value (NPV) of cash flows for this investment?

Should the Bobcats sign the superstar? Yes, or No?

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