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National Cruise Line, Inc. 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)
		Non-operating 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
The estimated cost of the new ship and during of expected cash flows is:
		Estimated cost of new ship			$ 600,000,000
		Estimated period of cash flows in years		15
Required
a.For each of the itineraries, calculate the present values of the cash flows using required rates of return of both 12 and 16% using both present value factors and separately using Excel PV function. Assume a 15-year time horizon. Should the company purchase the ship with either or both required rates of return?
	Caribbean/Alaska
	12%
				=
	16%
				=
	Caribbean/ Eastern Canada
	12%
				=
	16%
				=
			Caribbean/Alaska	Caribbean/ Eastern Canada
	Rate		12%	16%	12%	16%
	Number of periods
	Payments
	Future value
	Type
	PV
b.The president is uncertain whether a 12 percent or a 16 percent required return is appropriate. Explain why,
c.Focusing on a 12 percent required rate of return, what would be the opportunity cost to the company of using the ship in the Caribbean/Eastern Canada itinerary rather than a Caribbean/Alaska itinerary?