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ABC Cruise Company has recently placed into service some of the largest cruise ships in the...

ABC Cruise Company has recently placed into service some of the largest cruise ships in the world. One of these ships, the ABC Queen of the Seas, can hold up to 4,000 passen­gers and cost $450 million to build. Assume the following additional information:

The average occupancy rate for the new ship is estimated to be 75% of capacity.

There will be 325 cruise days per year.

The variable expenses per passenger are estimated to be $100 per cruise day.

The revenue per passenger is 45 to be $600 per cruise day.

The fixed expenses for running the ship, other than depreciation, are estimated to be $100,000,000 per year.

The ship has a service life of 15 years, with a salvage value of $150,000,000 at the end of 15 years.

a. Determine the annual net cash flow from operating the cruise ship.

b. Determine the net present value of this investment, assuming a 14% minimum.

c. Assume that ABC decided to increase its price so that the revenue increased to $610 per passenger per cruise day and that it would have a salvage value at the end of 15 years of only 75,000,000. Would this allow ABC to earn a 20% rate of return on the cruise ship investment assuming no change in any of the other assumptions?

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