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)
		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
The estimated cost of the new ship and during of expected cash flows is:
		Estimated cost of new ship						$ 600,000,000
		Estimated period of cash flows in years				15
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% using both present value factors and separately using Excel PV function. Assume a 15-year time horizon. Should the company purchase the ship with either or both required rates of return?
	Caribbean/Alaska			Table
	12%				B9.2
						=
	16%
						=
	Caribbean/ Eastern Canada
	12%
						=
	16%
						=
			Caribbean/Alaska				Caribbean/ Eastern Canada
	Rate		12%		16%		12%		16%
	Number of periods
	Payments
	PV using Excel function
	Note- To use the excel PV Function, click on "Forumulas" on the top tab of this document
	Then click on "Financial" and scroll down to PV and click on that
			You will need to enter the rate
			Then enter the # of periods
			Then enter the "payments" - this is the annual cash flow per year in the given information
b.The president is uncertain whether a 12 percent or a 16 percent required return is appropriate. Explain why,
c.Focusing on a 12 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?