Capitalized value of an asset.?

Question

Suppose you own a professional basketball team. You are negotiating for the services of a certain college basketball star who will soon begin a career as a professional player. You figure that having this player on your team will bring in $1,000,000 a year in added income from ticket sales for five years. After that the player may slow down a bit, but having him on the team will continue to bring in $500,000 in added ticket sales for another ten years. How much will you be willing to pay (in a single, one-time payment) to get the player for your team if the market interest rate is 12 percent per year?

I have searched through my textbook and online for examples on how to do this problem but I have yet to find one, please HELP! I greatly appreciate it.

Answer 1

You have to be more specific when addressing interest rates. Is the half a million for each year or the entire 10 years (which would pan out to $50,000 a year)?

For a mathematical equation that reflects market realities try:

Team net worth + revenue added + 12% = team's market capitalization

Calculate a 10 year contract by the weight of importance a particular company employee (impending star) brings to the entire franchise in leiu of revenue and liabilities. A 10% employee for Mark Cuban of the Dallas Mavericks for instance, brings in over a billion dollars a year.