Problem 9-4

Vermillion Cruise Line is considering the acquisition of a new ship that will cost $200,800,000. 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 ! Caribbean /' Eastern Alaska Canada MEL REVENUE $ 120, 540, 000 5105, 540, 000 LESS . Direct Program EXPENSES 125, 090, 000) 124, 120, 000) Indirect program EXPENSES (19, 930, 000) (19, 930, 000 ) Monoperating EXPENSES 121, 030, 000') 121, 030, 000) Add back depreciation 1 15, DOO, OOD 1 15, DOO, OOO Cash flow PER YEAR 5:165, 890, 000 5 155, BED, OODPresent value at 7% Present value at 11% Caribbean/Alaska tA Caribbean/Eastern Canada $ Should the company purchase the ship with either or both required rates of return? The company should purchase the ship with of return