Grantchester Rovers is a professional football club having had some success nationally and in Europe in recent years. As a result of this, and astute financial planning and management, the club have accumulated an additional £15 million to spend on future development ready for the 2015/2016 season. The board of directors are considering two, mutually exclusive options, for investing the funds available with a view to the future.
The first option is to acquire another player. James, a creative and goal scoring midfielder, has attracted the attention of the team manager and is available from his current club for a transfer fee of £15 million. A decision to acquire James would release an older player, Jenkins. An offer of £3 million has already been received and Jenkins has indicated he would like to go. This offer will only be accepted if James agrees to sign for Melchester. If this does not happen, Jenkins will be expected to stay at the club until his contract expires in three years. During this time Jenkins would receive a salary of £350,000 per year and a loyalty bonus of £1 million at the end of his contract. If Jenkins leaves now his loyalty bonus will be paid now. James would want a salary of £500,000 per year and a terminal bonus of £2,500,000. Assuming James is acquired, the team manager estimates that match day receipts will increase by £ 1.5 million in the first year and by 5% year on year after that.. There would also be an increase in shirt sponsorship with a £6 million payment on at the start of 2015/16 season. In addition Grantchester expect to see a £1 million increase in broadcast revenue in 2015/16 with a ten per cent year on year increase and increased merchandising sales of £120,000 in 2015/2016 with a five percent year on year increase.
The second option for the club is to improve its hospitality facilities especially the corporate boxes. The Barnes stand would be developed at a capital cost of £5 million and more corporate hospitality boxes opened plus there would need to be an improvement in bar and kitchen facilities needing a further £2 million of capital expenditure and £1,000,000 of working capital.
Match day revenues in 2015/2016 would increase by £2 million, increasing every year by 5%. Grantchester have contracted for a new ground to be built ready for the 2020/21 season.
Using the information given above calculate the effects on cash flow for both sets of circumstances viz: The purchase and sale of James and Jenkins and the resultant cash flows and the improvements to the Barnes stand and those resultant cash flows.
IMPORTANT – All capital expenditure/receipts from player movements and improvements plus any expenditure on working capital should be done prior to the first season.
You are only required to calculate Net Cash Flows for both options, there are no Opening and Closing Balances. You should calculate net cash flows for the following: Pre-season expenditure, 2015/16, 2016/17, 2017/18, 2018/19, 2019/20 and Totals.
Using your results from part 1 calculate Net Present Value for both options using present value rates shown below:
As with Part 1 all capital expenditure and working capital should be treated as occurring Pre-season in Year 0.
From the results of your work in part 2 make a recommendation as to which option should be undertaken from a financial point of view. It is vitally important that a business develops plans for the future. Briefly discuss and explain the planning process and the role of forecasted financial statements.