1-

Net Present Value Method

Opulence Corporation operates several large cruise ships. One of these ships, the Bellwether, can hold up to 3,700 passengers and cost $740 million to build. Assume the following additional information:

• There will be 300 cruise days per year operated at a full capacity of 3,700 passengers.
• The variable expenses per passenger are estimated to be $70 per cruise day.
• The revenue per passenger is expected to be $350 per cruise day.
• The fixed expenses for running the ship, other than depreciation, are estimated to be $80,808,000 per year.
• The ship has a service life of 10 years, with a residual value of $120,000,000 at the end of 10 years.

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.352	2.991
6	4.917	4.355	4.111	3.784	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

a. Determine the annual net cash flow from operating the cruise ship.

Revenues	$
Variable expenses
Fixed expenses
Annual net cash flow	$

b. Determine the net present value of this investment, assuming a 10% minimum rate of return. Use the present value tables provided above. If required, round to the nearest whole dollar.

Present value of annual net cash flows	$
Present value of residual value
Total present value	$
Amount to be invested
Net present value	$

2-

Decision on Accepting Additional Business

Brightstone Tire and Rubber Company has capacity to produce 272,000 tires. Brightstone presently produces and sells 208,000 tires for the North American market at a price of $94 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 32,000 tires for $78.9 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows:

Direct materials	$36
Direct labor	13
Factory overhead (70% variable)	22
Selling and administrative expenses (30% variable)	19
Total	$90

Brightstone pays a selling commission equal to 5% of the selling price on North American orders, which is included in the variable portion of the selling and administrative expenses. However, this special order would not have a sales commission. If the order was accepted, the tires would be shipped overseas for an additional shipping cost of $5 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $160,000.

a. Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors. If an amount is zero, enter zero "0". If required, round interim calculations to two decimal places.

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
January 21
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Direct materials
Direct labor
Variable factory overhead
Variable selling and admin. expenses
Shipping costs
Certification costs
Income (Loss)	$	$	$

Determine whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors.

b. What is the minimum price per unit that would be financially acceptable to Brightstone? Round your answer to two decimal places. $per unit

3-

Product Decisions Under Bottlenecked Operations

Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $107,000 for the company as a whole. In addition, the following information is available about the three products:

	Large		Medium		Small
Unit selling price	$108		$154		$398
Unit variable cost	85		126		350
Unit contribution margin	$ 23		$ 28		$ 48
Autoclave hours per unit	2		4		6
Total process hours per unit	4		8		18
Budgeted units of production	2,400		2,400		2,400

a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production.

	Large	Medium	Small	Total
Units produced
Revenues	$	$	$	$
Less: Variable costs
Contribution margin	$	$	$	$
Less: Fixed costs
Income from operations				$

b. Prepare an analysis showing which product is the most profitable per bottleneck hour. Round the "Unit contribution margin per production bottleneck hour" amounts to the nearest cent.

	Large	Medium	Small
Unit contribution margin	$	$	$
Autoclave hours per unit
Unit contribution margin per production bottleneck hour	$	$	$