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)
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

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 percent. Assume a 15-year time horizon. Should the company purchase the ship with either or both required rates of return?

b. The president is uncertain whether a 12 percent or a 16 percent required return is appropriate. Explain why, in the present circumstance, spending a great deal of time determining the correct required return may not be necessary.

c. Focusing on a 12 percent required rate of return, what would be the opportunity cost to the company of using the ship.