Question
Pukalani 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
Pukalani 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/Alaska Caribbean/Eastern Canada
Net revenue $119,000,000 $104,000,000
Less:
Direct program expenses (25,160,000) (23,890,000)
Indirect program expenses (19,860,000) (19,860,000)
Non operating expenses (20.810,000) (20.810.000)
Add back depreciation 115,000,000 115,000,000
Cash flow per year $168,170,000 $154,000,000
For each of the itineraries, calculate the present values of the cash flows using required rates of return of both 11 and 15 percent. Assume a 15-year time horizon.
Present value at 11% Present value at 15%
Caribbean/Alaska $? $?
Caribbean/Eastern Canada $? $?
The company should purchase the ship with___________? of return
Focusing on a 11 percent required rate of return, what would be the opportunity cost to the company of using the ship in a Caribbean/Eastern Canada itinerary rather than a Caribbean/Alaska itinerary?
Opportunity cost ?
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