• United Cruises; A cruise ship service provider in AU
• CEO: Margot Robbie, CFO: Rafael Nadal
• Asked about buying two new cruise ships in 2020

; King Voyager (KV) and Queen Spirit (QS)

> Buy both two or do not buy at all

• Beyonce Drake (Accounting department), Dwayne Johnson (Sales department)

1. United Cruises; Medium-sized AU cruise experience provider.

Purchasing KV and QS immediately

KV = $45 million, QS = $42 million

Useful life = 10 yrs (both)

The required rate of return = 9%

FV of KV = 106.53 millions

FV of QS = 99.43 milloins

1. Borrow $87 million from Macquarie Bank to fund the purchase of two cruise ships

An amortisation schedule that indicates that the yearly principal

Interest repayments on the debts = $10 million

1. United Cruises has been operating since 2010.

Two old cruise ships: Duke Magic (DM) and Princess platinum (PP)

Purchased 5 yrs ago, being depreciated over a 25-year life

New ships >> Be depreciated over a 35-yr life [more modern and larger]

1. KV and QS need to be fitted with a special propeller.

Beyonce: there are two idle special propellers >> purchased 9 yrs ago, $3 each, has been written off for tax purposes.

Forecasts; each special propeller will be worthless 10 yrs from 2020

Each special propeller MV = $1,440,000

1. KV and QS

Each requires spare parts inventory of $2.5 million, operating inventory of $3 million

>> included the annual $1.6 million maintenance expenses incurred

Each incurs maintenance expenses of $1.6 million per annum during the life

1. Insurance

Be expected increase by $3.22 million to $6 million from buying new ships

Forecasts; annual insurance expenses KV and QS will increase by 0.5% every yr

Hint: assume that all operating cash flows occur at the end of the year, unless specified otherwise.

1. Paid $55,000 to Boomerang Marketing Group for market research investigating the demand for the new ships

• Paid 3 mths ago
• Received report 2 mths ago
• Beyonce Drake suggests that the market research fee be included as an opportunity cost incurred in Year 0 of the King Voyager and Queen Spirit investment decision. (?)

1. To provide 'Premium Overhaul', periodic $2.9 million per cruise ship is required every 4 yrs. Will occur at the end of Year 4
2. KV and QS >> increase total annual port charges for United Cruises ($1.45 million to $1.98 million) and total yearly fuel expense for United Cruises ($4.65 million to $7 million)

The port charges can be claimed as a tax deduction

1. Data summary

Duke Magic

Princess Platinum

King Voyager

Queen Spirit

Number of cruises per year

12

12

12

12

Average crew salary per member per year

$45,000

$45,000

$50,000

$50,000

Number of crew members per year

100

100

120

120

Food and drinks tonnes per year

45

45

50

50

Average sales price per customer per cruise journey

$4,000

$4,000

$7,000

$5,000

Average number of customers per cruise journey

500

500

600

600

1. The introduction of the two new cruise ships will result in bulk buying discounts for United Cruises.

Without KV and QS, food drink costs $32/kg for all cruise ships.

With KV and QS, food drink costs $28/kg for all cruise ships.

1. AU Government new policies

1) About climate change; cruise ship providers to pay a fee for contributing to harmful emissions that have a negative impact on the environment. Will be implemented in Year 2. Cost $0.35 million per year per cruise ship.

2)Cruise ship providers to have a quarantine zone to protect customers from contagious viruses. Will be implemented in Year 3. Cost $0.05 million per cruise ship

1. 6 mth ago, Rafael flew to NZ for researching the market area. Total cost $3,000
2. United Cruises rents the entire level eight of the Deloitte Building for its call centre.

Yearly call centre salary costs of $40,000

Rent costs $190,000 p.a. To rent out any one entire level in the Deloitte Building.

Rent of level nine >> Yearly call centre salary costs of $80,000

1. Each cruise ship company must pay a one-off fee of $10 million to the International Sea and Port Authority at the establishment of the cruise ship company

NO fee after the cruise ship company is established and operating

All operating expenses are tax deductible in the year the expense is incurred and the tax rate is 30%

1. Total fixed costs for KV and QS together are equal to $1.32 million per annum

Last year, United Cruises total annual fixed costs (excluding headquarter costs)

= $2.15 million

Total yearly headquarter costs = $2.99 million >> Not change due new ships

Margot wants to allocate an equal share of the yearly headquarter costs across

the 4 ships

1. A competing cruise ship company will offer cruise ships journeys, starting in Year 9, for a five-year period. Whilst Oceania Cruiseliners is operating and while the King Voyager and Queen Spirit are operating, United Cruises anticipates that cash sales for the King Voyager will drop to 85% of the projected annual value, and cash sales for the Queen Spirit will drop by $5 million p.a. (note: United Cruises operating expenses are expected to remain the same).
2. In 10 years' time, the International Sea and Port Authority estimate that the market value of both the King Voyager and Queen Spirit will be $18 million if the regular four-year "Premium Overhaul" is not undertaken. However, if the regular four-year "Premium Overhaul" is undertaken, the King Voyager will be worth $26 million, and the Queen Spirit will be worth $24 million. In either case, the cruise ship propellers will have no value in 10 years' time.
3. To advertise of the introduction of the KV and QS, UC total marketing expenses p.a. Will in crease from $2 to $6 million during Year 1,2, and 3.

As part of this initial marketing campaign, US will sponsor the AU swimming and rowing team at 2021 Tokyo Olympic games, and the Socceroos at the 2022 World Cup in Qatar.

1. The Australian Tax Office (ATO) issues the rule 2000/18 "Passenger ships", which indicates that the effective life of cruise ships like the Queen Spirit qualify for an effective life of 30 years. Through a special ruling, the ATO has indicated that the King Voyager has an effective life of 32 years because the King Voyager has a more advanced navigational system which is required due to blackspots in the southern parts of New Zealand. According to the ATO, special propellers (as used in the King Voyager and Queen Spirit) have an effective life of 8 years.
2. Additional assignment instructions

The following instructions will provide consistency in your assignment solutions, allow the marker to better understand your calculations, and increase the speed with which we can mark your assignments and the speed in which we can let you know what you scored for the assignment:

a. For each relevant and different type of operating cash outflows/costs relating to "Cash Flows over the life", please record the total across the King Voyager and Queen Spirit cruise ships together in your preformatted spreadsheet. For example, if you think insurance costs should be included in your solution, please report the total insurance costs across the King Voyager and Queen Spirit cruise ships together in your spreadsheet (as one single entry in your spreadsheet), do not include separate entries for insurance costs for the King Voyager and Queen Spirit in your spreadsheet.

b. For any relevant cash flow relating to sales relating to "Cash Flows over the life", please record separate entries for the King Voyager cruise ship in your spreadsheet and separate entries for the Queen Spirit cruise ship in your spreadsheet.

Complete the cash flow(excel file: Please access the link below.) in relation to this information.

https://1drv.ms/x/s!Au4VTrImedpuh3-CY0nm1hwuNPbq?e=tq0YAH