Question

Greencastle Cruise Line is considering the acquisition of a new ship that will cost $200,500,000. 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 $119,670,000 $104,670,000 Less:     Direct program expenses (25,150,000) (23,900,000)     Indirect program expenses (19,990,000) (19,990,000)     Nonoperating expenses (20,960,000) (20,960,000) Add back depreciation 115,000,000 115,000,000 Cash flow per year $168,570,000 $154,820,000 Click here to view factor tables

For each of the itineraries, calculate the present values of the cash flows using required rates of return of both 12 and 16 percent. Assume a 15-year time horizon. (Round present value factor calculations to 4 decimal places, e.g. 1.2151 and final answer to 0 decimal places, e.g. 125. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Present value at 12% Present value at 16% Caribbean/Alaska $ $ Caribbean/Eastern Canada $ $ Should the company purchase the ship with either or both required rates of return? The company should purchase the ship with 16% rate12% rateeither of the two rates of return. LINK TO TEXT

Focusing on a 12 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

Answer 1

	Caribbean/Alaska	Caribbean/Eatern canada	Total
Cash Flow per year	$16,85,70,000	$15,48,20,000
PVAF(12%,15)	6.8109	6.8109
PV of cash flow at 12%	$1,14,81,06,670	$1,05,44,57,345	$2,20,25,64,015
PVAF(16%,15)	5.5755	5.5755
PV of cash flow at 16%	$93,98,62,035	$86,31,98,910	$1,80,30,60,945
The company should purchase at 12% rate since the PV of cashflow is higher than cost
If the company uses a caribbean/eastern itineary rather than Caribbean/Eatern canada then the opportunity
cost shall be $9,36,49,235($1,14,81,06,670 - $1,05,44,57,345)