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Please Show All Formulas National Cruise Line, Inc. is considering the acquisition of a new ship that will cost $200,000,000. In this regard, the president
Please Show All Formulas
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? | |||||||
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