please answer this question what is cash flow at the start —————————————–
please answer this question what is cash flow at the start
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Information gathered from various departments:
1. Six months ago Royal Oceania Cruises paid $30,000 to Wallaby Consultants for market
research investigating the demand for a new ship (“Pacific Dream”). The report stipulates that
there is strong demand from tourists, individuals aged 30-60, and from individuals who earn
an income of $120,000+ per annum.
2. Two months ago, Royal Oceania Cruises invited its wealthiest and frequent cruise customers
to an event held at “The Star” casino. The event had a total cost of $5,500 to cover payments
for the event space, food and drink and service staff. The purpose of the event was to learn
what would be desirable in the new “Pacific Dream” cruise ship. Roger Federer (from the
Accounting department) suggests that the $5,500 event costs should be included as an
opportunity cost incurred in year 0 of the “Pacific Dream” investment decision.
3. “Sea Princess” and “Ovation of the Seas” are the two other existing cruise ships in the Royal
Oceania cruise fleet, both of these cruise ships have been depreciated over a 15-year life. The
“Pacific Dream” will be purchased today for $32 million and will be the largest and most
luxurious cruise ship operating in the Oceania region. The “Pacific Dream” will measure 348
metres in length, be able to reach a maximum speed of 30 knots and has a maximum passenger
capacity of 2,000 customers. Due to the advanced navigational system, novel skydiving
opportunities, and mini submarines allowing customers to uniquely observe sea life and
creatures, Roger suggests that “Pacific Dream” should be depreciated over a 25-year life
4. Due to the significant size of the “Pacific Dream”, Sydney Ports requires that the “Pacific
Dream” be immediately fitted with a special thruster to manoeuvre within tight spaces. The
current market value of a special thruster is $5 million, Roger expects the special thruster to
have a useful life of 20 years.
5. The special thruster generates an unpleasant sound when in operation. Royal Oceania will
immediately install a noise cancelling device to reduce the effects of the unpleasant sound
generated by the special thruster. According to the Royal Oceania Cruises accounting books,
an idle noise cancelling device (which has been written off for tax purposes) is currently stored
in their North Sydney premises and is compatible with the “Pacific Dream” cruise ship. The
Global Maritime Agency website shows that the current market value for the noise cancelling
device is $750,000 and forecasts indicate that the noise cancelling device will be worthless 10
years from today. Roger informs you that the noise cancelling device was previously purchased
for $2 million.
6. All cruise ships operating in Australian/international waters must purchase a maritime
licence. The license must be purchased today and costs $555,000 and lasts for a three-year
period. If a cruise ship does not have a license it cannot operate in Australian/international
waters. The license can be claimed as an operating expense in the year in which the license was
purchased. All operating expenses are tax deductible in the year the expense is incurred and
the tax rate is 30% (hint: if an operating expense is incurred in Year 0, then you can record the
tax deduction in year 0). The license cost has remained the same since it was introduced in
2005, and the cost is expected to remain the same in the future.
7. To heavily promote the “Pacific Dream”, Royal Oceania Cruises will spend $2.10 million
p.a. during the first two years of operation. This campaign will involve sponsorship of the
Wallabies during the 2019 World Cup in Japan and subsequently of the Socceroos in the lead
up to the 2022 World Cup. Following the end of Year 2, advertising for the “Pacific Dream”
will total $750,000 annually.
8. Hugh is slightly concerned by the large marketing costs associated with the “Pacific Dream”
investment, so in agreement with Taylor they decide to reduce the total annual advertising
expenses associated with the “Sea Princess” and “Ovation of the Seas” from $975,000 p.a. to
$810,000 p.a. during the entire life of the “Pacific Dream” project.
9. During a lunchtime briefing the sales team provide you with the following sales information
about the “Pacific Dream”, the sales information provided below accounts for seasonal
patterns:
• Average sales price per customer = $1,000 per cruise journey.
• 25 “Pacific Dream” cruises run every year.
Average number of customers = 1,500 per cruise journey.
10. The introduction of the “Pacific Dream” is expected to cannibalise the sales of the “Sea
Princess” and “Ovation of the Seas” during the entire “Pacific Dream” investment. In total, the
sales team forecast that total sales across the “Sea Princess” and “Ovation of the Seas” will
decline by $5 million annually.
11. The “Pacific Dream” is expected to increase Royal Oceania Cruises total annual fuel
expenses by $2.33 million to $4 million. Based on forecasts of future fuel prices and depleting
fuel resources, annual fuel expenses for the “Pacific Dream” will increase by 2% every following year. The current salary of the 200 crew members required to operate the “Pacific
Dream” is expected to total $13,500,000 per annum. However, following the end of year 5 it
is forecast that each crew member’s annual salary is expected to increase by $5,000. Further
changes in salary are not expected in subsequent years.
12. Due to the introduction of the “Pacific Dream”, Royal Oceania Cruises fixed costs
(excluding headquarter costs) will increase by $1.75 million to $3.90 million per year. Royal
Oceania Cruises headquarters is based in Tower One in Barangaroo. Annual headquarter costs
total $3.66 million and such costs are not expected to increase in the foreseeable future. Taylor
wants to allocate an equal share of the annual total headquarter costs for Royal Oceania Cruises
across the “Pacific Dream”, “Sea Princess” and “Ovation of the Seas”.
13. Without “Pacific Dream” Royal Oceania Cruises require 90 tonnes of food and drink per
year where each kilogram costs $28/kg for all cruise ships. The introduction of the “Pacific
Dream” will result in bulk buying discounts for Royal Oceania Cruises. With “Pacific Dream”
each kilogram of food and drink costs $25/kg for all cruise ships, this brings the total food and
drink for Royal Oceania Cruises to 170 tonnes per year, meaning 80 tonnes of food and drink
is required annually for “Pacific Dream”.
14. All of the cruise ships in the Royal Oceania fleet dock at the Overseas Passenger Terminal
in Circular Quay. “Pacific Dream” will also dock at Circular Quay and will increase the Royal
Oceania Cruises total annual port charges from $2.30 million to $2.87 million. When cruise
ships dock in Circular Quay they obstruct views of the Opera House and Harbour Bridge, which
results in reduced sales for surrounding restaurants (e.g., Aria, Quay, Bennelong). As a result,
Royal Oceania Cruises pays these restaurants $40,000 p.a. to account for the loss in sales, this
figure is expected to increase by $20,000 per annum with the introduction of “Pacific Dream”.
15. The “Pacific Dream” cruise ship will mean that the Royal Oceania Cruises call centre will
be relocated from North Sydney to a larger facility in Heathcote. The rent expense for the North
Sydney centre was $150,000 per annum and the rent expense for the Heathcote centre is
$87,000 per annum. The larger call centre is required to fit additional staff members which will
increase annual call centre salary expenses by $50,000 to $100,000.
16. During a meeting involving Hugh, Taylor, and the accounting and sales team, it is agreed
that the plan is to sell “Pacific Dream” in 10 years’ time. To maximise the selling price of the
“Pacific Dream” in ten years’ time, a regular three-year refurbishment is required, the first
refurbishment occurs at the end of year 3 and costs $1.66 million, the second refurbishment
costs $2.88 million and the third refurbishment costs $1.96 million. The refurbishments take
place during breaks between cruise journeys, and as a result there is no impact upon the
operating revenues and other expenses associated with the operation of the “Pacific Dream”.
The refurbishments keep the cruise ship equipped with the latest restaurants, shops and
entertainment. The refurbishment costs can be claimed as a tax deduction.
17. In addition to the major refurbishment costs, the “Pacific Dream” will require annual minor
maintenance expenses of $0.96 million. If Royal Oceania Cruises proceed with the “Pacific
Dream” project the spare parts inventory must be increased by $1.33 million from existing
levels and purchased immediately. The annual maintenance of $0.96 million includes the cost
of replenishing the inventory required to operate the “Pacific Dream”. Royal Oceania Cruises
will also have to purchase additional insurance for the “Pacific Dream” at $2.56 million per
annum (hint: assume that cash flows relating to insurance occur at the end of the year).
18. After a conference call with your contact (Mick Jagger) at the Global Maritime Agency,
you learn that if regular three-year major refurbishments are made to the “Pacific Dream” then
in 10 years’ time the “Pacific Dream” will have an estimated market value of $22.90 million.
Otherwise, the value of the “Pacific Dream” in 10 years’ time will be $15 million. In either
case, the special thruster will have an estimated market value of $1.11 million in 10 years’
time.
19. The Australian Tax Office (ATO) has recently released updates to its tax rulings. Under
taxation ruling 2000/18 “Passenger ships”, the effective life of cruise ships like the “Pacific
Dream” qualify for an effective life of 30 years. According to the ATO, the special thruster has
an effective life of 6 years and the noise cancelling device has a depreciation rate of 20% per
year.
20. In order to pay for the “Pacific Dream”, Royal Oceania cruises will pay $4 million in cash
and the rest using debt which will be obtained from the Commonwealth Bank. Roger emails
you an amortisation schedule which shows you that the principal and interest payments on the
debt are $3.75 million annually, the schedule also shows that the debt will be fully repaid by
the end of the project’s life. In consultation with Wallaby Consultants, advisors at the
Commonwealth Bank, Hugh and Taylor, the required return for “Pacific Dream” is 12.5%.
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