National Cruise Line is considering the acquisition of a new ship that will cost $200,000,000. In this regard, the president of the company asked the CFO to analyze cash flows associated with operating the ship under two alternative itineraries: Itinerary 1, Caribbean Winter/Alaska Summer and Itinerary 2, Caribbean Winter/Eastern Canada Summer. The CFO estimated the following cash flows, which are expected to apply to each of the next 15 years:

		Caribbean/ Alaska		Caribbean/Eastern Canada
Net revenue		$120,000,000		$105,000,000
Less:
Direct program expenses		(25,000,000)		(24,000,000)
Indirect program expenses		(20,000,000)		(20,000,000)
Nonoperating expenses		(21,000,000)		(21,000,000)
Add back depreciation		115,000,000		115,000,000
Cash flow per year		$169,000,000		$155,000,000

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For each of the itineraries, calculate the present values of the cash flows using required rates of return of both 12 and 16 percent. Assume a 15-year time horizon. (Round present value factor calculations to 4 decimal places, e.g. 1.2151 and final answer to 0 decimal places, e.g. 125. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Present value at 12%		Present value at 16%
Caribbean/Alaska		$		$
Caribbean/Eastern Canada		$		$

Should the company purchase the ship with either or both required rates of return?

The company should purchase the ship with

12% rateeither of the two rates16% rate

of return.

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Focusing on a 12 percent required rate of return, what would be the opportunity cost to the company of using the ship in a Caribbean/Eastern Canada itinerary rather than a Caribbean/Alaska itinerary?

Opportunity cost