Week 7 Homework

HW Week 7 Section 1

! ! Problem 9-3! !

Machine Initial Outlay Cash Flow A ($70,000) $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 10% $17,105.21 18% B ($95,000) $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 10% $13,881.52 15%

Discount Rate NPV IRR

Machine A should be purchased since, it has higher NPV and Higher IRR than B

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HW Week 7 Section 1

Problem 9-4!

Caribbean/Alaska Net revenue Less: Direct program expenses Indirect program expenses Non-operating expenses Add back depreciation Cash flow per year (25,000,000) (20,000,000) (21,000,000) 115,000,000 $169,000,000 divided by the life of (24,000,000) (20,000,000) (21,000,000) 115,000,000 $155,000,000 15 years, or $120,000,000 Caribbean/Eastern Canada $105,000,000

Annual depreciation to be added back is equal to $200,000,000 $13,333,333

Part a. For each of the itineraries, calculate the present values of the cash flows using required rates of return of both 12% and 16% Assum ea 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 12% $1,151,036,098.72 Present value of ship in Caribbean/Eastern Canada itinerary at 12% $1,055,683,995.87 Present value of ship in Caribbean/Alaska itinerary at 16% Present value of ship in Caribbean/Eastern Canada itinerary at 16% $942,252,091.48 $864,195,705.20

A) Yes, based on the cash flows, the net present value would be positive. The company can purchase the ship either return.

B) It is not necessary because the NPV will still be positive C) The opportunity cost would be 95352103

HW Week 7 Section 1

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Problem 9-5!

Year Outlay Revenue from film Revenue from video Total revenues Less: Depreciation Profit after depreciation Less: tax Profit after tax Add: Depreciation Cash flows NPV =

0 ($20,000,000)

1 $16,500,000 $10,000,000 $26,500,000 $12,000,000 $14,500,000 $5,075,000 $9,425,000...