Question

OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $5000 million, and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70.0 million and its cost of capital is 12.0 % a. Prepare an NPV profle of the purchase. b. Identify the IRR on the graph c. Should OpenSeas proceed with the purchase? d. How far off could OpenSeas' cost of capital estimate be before your purchase decision would change?

Answer 1

| А B 1 100 Purchase price of ship life CF from operations COC In $ Millions 500 20 Yrs 70 12% b) IRR Graph 7 8 a) NPV PVAF (12%, 20) CF 10 7.47 70.00 522.86 500.00 22.86 PV of CF Less : Cost NPV 11 -57 12 -96 10.0% 11.0% 12.0% 12.7% 13.0% 14.0% 15.0% 14 c) Yes should proceed with the purchase 15 d) using interpolation 16 PV of CF @ 13% 491.73 PV of CF @ 12 % 522.86 -8.27 Series1 Series2 17 19 20 IRR =Start rate+(NPV at start rate / NPV at start rate - NPV at end rate) X Difference between rate 12+(22.86/22.86-(-8.27)) *1 12.73% If CoC increases more than 12.73 % then project should be rejected 24 b) IRR is where NPV is Zero 12.73%