FINANCE FOR SPORT AND RECREATION: Working Capital & Leases

This assignment solution delves into the financial aspects of the sport and recreation industry, specifically addressing working capital management and lease versus buy decisions. The analysis begins by calculating the optimal cash discount that can be offered by the Sacramento Basketball Club, considering the impact of payment timelines on interest and bad debts. The solution then proceeds to a lease versus buy analysis, comparing the net present value (NPV) of both options over a five-year period, factoring in purchase prices, tax effects of depreciation, and potential sale values. The analysis concludes that leasing is financially more advantageous than buying, based on the lower cash outflow in terms of NPV.

1
FINANCE FOR SPORT AND RECREATION INDUSTRY

2
Table of Contents
Question 2: Working Capital 3
Question 4: Leases 4

3
Answer to question 2: Working Capital
Sacramento Basketball Club:
Assumptions:
a. Let us assume $100 as Sales Value of the Ticket
b. Let us assume 360 days in a year
c. It is assumed that the uncollected amount shall remain unpaid at the end of the year and be
converted into Bad Debt. Hence the entire amount is an expense.
Payment Received % of
Customers
Amount Received Interest and Bad Debts Cost
Saved
30 days (2%
discount taken) 20% ($100*20%*98%) = $19.6 = 30/360*12% = 0.0100
*$19.6 = $0.196
60 days after sale 20% ($100*20%) = $20 = 60/360*12% = 0.0200 * $20
= $0.4
90 days after sale 40% ($100*40%) = $40 = 90/360*12% = 0.0300 * $40
= $1.2
120 days after sale 15% ($100*15%) = $15 = 120/360*12% = 0.0400 *
$15 = $0.6
Uncollected 5% $0 = $5*12% = $0.6 + $5 = $5.6
Total Amount Saved $7.996
Hence the Total Amount that can be offered as Cash Discount is the Total Interest and Bad Debt
Costs saved as computed above which is $7.996 on $ 100 or 7.996% of the Sales Value
approximated to 8%.

4
Answer to question 4: Lease vs Buy Decision
Buy Decision:
Period 0 1 2 3 4 5
Purchase
Price
($5325+$175)*
40 =
($2,20,000)
- - - - -
Tax effect of
Depreciatio
n
-
$1,100 *
30% =
$330
$1,100 *
30% =
$330
$1,100 *
30% =
$330
$1,100 *
30% =
$330
$1,100 * 30% =
$330
Sale Value $50*25 =
$1,250 - - - - $1,000 * 40 =
$40,000
Tax effect of
gain
$1,250*30% =
($375) - - - - $40,000 * 30%
= ($12,000)
Total Cash
Flow ($2,19,125) $330 $330 $330 $330 $28,330
Discount
Factor PV
@ 8%
1 0.9259 0.8573 0.7938 0.735 0.6806
Discounted
Cash Flows ($2,19,125) $305.547 $282.909 $261.954 $242.55 $19,281.398
Total NPV $(1,98,750.642)
Lease Decision:
Period 0 1 2 3 4 5
Lease
Expense
$1,125*40
=
($45,000)
$1,125*40
=
($45,000)
$1,125*40
=
($45,000)
$1,125*40
=
($45,000)
$1,125*40
=
($45,000)
-
Tax
benefit of
lease
$45,000*3
0% =
$13,500
$45,000*3
0% =
$13,500
$45,000*3
0% =
$13,500
$45,000*3
0% =
$13,500
$45,000*3
0% =
$13,500
-
Acquisitio
n Price - - - - - ($40,000)
Disposal
Amount - - - - - $1,000 * 40 =
$40,000
Total
Cash
Flow
($31,500) ($31,500) ($31,500) ($31,500) ($31,500) -
Discount
Factor
PV @ 8%
1 0.9259 0.8573 0.7938 0.735 0.6806
Discounte
d Cash
Flows
($31,500) ($29,165.8
5)
($27,004.9
5)
($25,004.7
)
($23,152.5
) -
Total NPV ($1,35,828.0)

5
Outcome of Analysis:
As the Cash Outflow in terms of Net Present Value is higher in Buy Decision and lower in
Lease Decision, we shall opt to lease instead of buying the same.