Net Present Value Method Opulence Corporation operates several large cruise ship
ID: 2589602 • Letter: N
Question
Net Present Value Method
Opulence Corporation operates several large cruise ships. One of these ships, the Bellwether, can hold up to 2,200 passengers and cost $440 million to build. Assume the following additional information:
There will be 300 cruise days per year operated at a full capacity of 2,200 passengers.
The variable expenses per passenger are estimated to be $80 per cruise day.
The revenue per passenger is expected to be $400 per cruise day.
The fixed expenses for running the ship, other than depreciation, are estimated to be $54,912,000 per year.
The ship has a service life of 10 years, with a residual value of $70,000,000 at the end of 10 years.
a. Determine the annual net cash flow from operating the cruise ship.
b. Determine the net present value of this investment, assuming a 10% minimum rate of return. Use the present value tables provided above. If required, round to the nearest whole dollar.
Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162Explanation / Answer
Answer a.
Number of passengers per ship = 2,200
Number of cruise days per year = 300
Revenue = $400 * 300 * 2,200
Revenue = $264,000,000
Variable Expenses = $80 * 300 * 2,200
Variable Expenses = $52,800,000
Fixed Expenses = $54,912,000
Annual Net Cash Flows = Revenues - Variable Expenses - Fixed Expenses
Annual Net Cash Flows = $264,000,000 - $52,800,000 - $54,912,000
Annual Net Cash Flows = $156,288,000
Answer b.
Present Value of Annual Net Cash Flows = Annual Net Cash Flows * PVA of $1 (10%, 10)
Present Value of Annual Net Cash Flows = $156,288,000 * 6.145
Present Value of Annual Net Cash Flows = $960,389,760
Present Value of Residual Value = $70,000,000 * PV of $1 (10%, 10)
Present Value of Residual Value = $70,000,000 * 0.386
Present Value of Residual Value = $27,020,000
Total Present Value = Present Value of Annual Net Cash Flows + Present Value of Residual Value
Total Present Value = $960,389,760 + $27,020,000
Total Present Value = $987,409,760
Net Present Value = Total Present Value - Amount to be Invested
Net Present Value = $987,409,760 - $440,000,000
Net Present Value = $547,409,760
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.