Carnival Corporation has recently placed into service some of the largest cruise

Question

Carnival Corporation has recently placed into service some of the largest cruise ships in the world. One of these ships, the Carnival Glory, can hold up to 3,000 passengers and cost $530 million to build. Assume the following additional information:

• The average occupancy rate for the new ship is estimated to be 85% of capacity.
• There will be 300 cruise days per year.
• The variable expenses per passenger are estimated to be $80 per cruise day.
• The revenue per passenger is expected to be $310 per cruise day.
• The fixed expenses for running the ship, other than depreciation, are estimated to be $80,000,000 per year.
• The ship has a service life of 10 years, with a salvage value of $90,000,000 at the end of 10 years.



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

Revenues $
Less: Variable expenses $
Fixed expenses $
Annual net cash flow $

b. Determine the net present value of this investment, assuming a 12% minimum rate of return.

Present value of annual net cash flows $
Present value of salvage value $
Total present value $
Initial investment $
Net present value $

I have the answer to a. but need help with b.

Explanation / Answer

a) Net cash flow arrived as follows...         number       85% capacity per day total   of days Total in miilions Revenue 2550 310 790500 300 237150000 237.15 less:variable expense 2550 80 204000 300 61200000 61.2 less: Fixed expense         80000000 80 Net Cash flow         95950000 95.95 add: depreciation         44000000 44           139950000 139.95 Depreciation is calicualted as : ship cost = 530 million solvage value= 90 million life span = 10 years Depreciation = [530-90] /10 = 44 million b) NPV AT 12%   net cash Discounted  year  flows  at 12%   in millions in millions 1 139.95 124.955357 2 139.95 111.567283 3 139.95 99.6136457 4 139.95 88.9407551 5 139.95 79.4113885 6 139.95 70.9030254 7 139.95 63.3062727 8 139.95 56.5234578 9 139.95 50.467373 10 139.95 45.0601545   Total 790.748713   Salvage value 90   Dicounted at 12% 34.698896     825.447609   lees initial out lay 530   NPV 295.447609 The net present value would be = $295447609 THANQ         number       85% capacity per day total   of days Total in miilions Revenue 2550 310 790500 300 237150000 237.15 less:variable expense 2550 80 204000 300 61200000 61.2 less: Fixed expense         80000000 80 Net Cash flow         95950000 95.95 add: depreciation         44000000 44           139950000 139.95

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