Problem $9-4$ Present Value and "What If$"$ Analysis $-$ See Textbook page $9-30$

National Cruise Line, Inc. is considering the acquisition of a new ship that will cost $600,000,000.$ 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 $115,000,000115,000,000$

Cash flow per year $$169,000,000$ $$155,000,000$

The estimated cost of the new ship and expected cash flows are:

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 $($using Tables$)$ and separately using the Excel PV function. Assume a $15-$year time horizon. Should the company purchase the ship with either or both required rates of return?

$($Use Appendix Table B$9\mathrm{.}2$ to arrive at the factor$).$ Note: The PV values using the Table method vs$.$ Excel

will not be exactly equal, but will be very close in value.

Caribbean$/$Alaska

$12\%$ Cash Flow Factor

$\backslash$times $=$

$16\%$

$\backslash$times $=$

Caribbean$/$ Eastern Canada

$12\%$

$\backslash$times $=$

$16\%$

$\backslash$times $=$

Caribbean$/$Alaska Caribbean$/$ Eastern Canada

Rate $12\%16\%12\%16\%$

Number of periods

Cash Flow

Future value $$0$ $$0$ $$0$ $$0$

Type $0000$

PV

For the PV values in cells D$49,$E$49,$ F$49,$ G$49,$ use the Microsoft Excel functions. If you need help with the Excel function, see the Excel video.

The Excel video shows how to use the FORMAT and FINANCIAL tabs in Excel to choose a multitude of Excel functions$**$

You will be using the PV function in the drop down list to complete the above table.

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

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?