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:
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Required:
a. For each of the itineraries, calculate the present values of the cash flows using required rates of return of both 10 and 15 percent. Assume 15-year time horizon. Should the company purchase the ship with either or both required rates of return?
b. The president is uncertain whether a 10 percent or a 15 percent required retum is appropriate. Explain why, in the present circumstance, spending a great deal of time determining the correct required return may not be necessary.
c Focusing on a 10 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/Alaskaitinerary?