National Cruise Line, Inc. is considering the acquisition of a new ship that wil

Question

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

REQUIRED; Answers to the following,

Part A) For each of the itineraries, calculate the present values of the cash flows using required rates of return of

both 10% and 15% Assume a 15-year time horizon. Should the company purchase the ship with either or both

required rates of return?

Present value of ship in Caribbean/Alaska itinerary at 10% [formula?]

Present value of ship in Caribbean/Eastern Canada itinerary at 10% [formula?]

Present value of ship in Caribbean/alaska itinerary at 15% [formula?]

Present value of ship in Caribbean/Eastern Canada itinerary at 15% [formula?]

Part B) The president is uncertain whether a 10 percent or a 15 percent required return is appropriate. Explain why,

in the present circumstance, spending a great deal of time to determine the correct required return may not be necessary.

?

Part C) Focusing on a 10 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?

Explanation / Answer

Part A.

For Caribbean/Alaska (CA), OCF = $169,000,000

Rate = 10%, Period 15 Yrs

So PV of CA = 169000000*PVIFA(10%,15)

= 169000000*7.6061 = $1,285,430,900

For Caribbean/Eastern Canada (CE), OCF=$155,000,000

Rate = 10%, Period 15 Yrs

So PV of CE = 155000000*PVIFA(10%,15)

= 155000000*7.6061 = $1,178,945,500

For Caribbean/Alaska (CA), OCF = $169,000,000

Rate 15%, PV of CA = 169000000*PVIFA(15%,15)

= 169000000*5.8474

= $988,210,600

For Caribbean/Eastern Canada (CE), OCF=$155,000,000

Rate = 15%, Period 15 Yrs

So PV of CE = 155000000*PVIFA(15%,15)

= 155000000*5.8474

=$906,347,000

Part B.

Presidennt is uncertain because for a longer period of 15 years, it is difficult to predict the reqd return. All buisness goes througheconomic cycles & shipping is a very capital intensive industry.

Part C.

If we see the cost structure, except Net Rev & Direct program exp, all other costs are constant.

So Opportunity cost is (120M-105M) - (25M-24M)

= 15M-1M = 14M

So Over 15 Yrs, Present value of this opp cost

= 14M*PVIFA(10%,15) = 14M*7.6061 = $106,485,400

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.