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Problem 9-4 Present Value and What If Analysis National Cruise Line, Inc. is considering the acquisition of a new ship that will cost $200,000,000. In
| Problem 9-4 Present Value and "What If" Analysis | |||||||||
| 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 | Table | ||||||||
| 12% | B9.2 | ||||||||
| = | |||||||||
| 16% | |||||||||
| = | |||||||||
| Caribbean/ Eastern Canada | |||||||||
| 12% | |||||||||
| = | |||||||||
| 16% | |||||||||
| = | |||||||||
| Caribbean/Alaska | Caribbean/ Eastern Canada | ||||||||
| Rate | 12% | 16% | 12% | 16% | |||||
| Number of periods | |||||||||
| Payments | |||||||||
| PV using Excel function | |||||||||
| Note- To use the excel PV Function, click on "Forumulas" on the top tab of this document | |||||||||
| Then click on "Financial" and scroll down to PV and click on that | |||||||||
| You will need to enter the rate | |||||||||
| Then enter the # of periods | |||||||||
| Then enter the "payments" - this is the annual cash flow per year in the given information | |||||||||
| 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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Forensic Accounting And Fraud Examination
Authors: Mary Jo Kranacher, Richard Riley
2nd Edition
1119494338, 9781119494331
