OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would c

Question

OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $503 million, and would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $68.3 million (at the end of each year) and its cost of capital is11.4%.

a. Prepare an NPV profile of the purchase using the discount rates of 2%. 11.5% and 17.0%

b. identify the irr on a graph graph.

c. Should Open Space go ahead with the purchase

d. How far off could OpenSeas’ cost of capital estimate be before your purchase decission would change?

Explanation / Answer

Calculation of the Net Present Value NPV = Present Value of Cash Inflows- Cash Outflows Cash Flow( PVAF, 20 years, Life) 68.3(PVAF, 20 years, 11.4%)-503 68.3*7.75-503 529.96-503 26.96 Million The present Value is 26.96 Million Discount Rate = 2% NPV = 68.3*16.35-503 1116.80-503 Net Present Value = $ 613.80 Million Discount Rate = 11.5% NPV = 68.3*7.70-503 526.58-503 Net Present Value = $ 23.580 Million

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