Question

Halcyon Lines is considering the purchase of a new bulk carrier for $9 million. The forecasted revenues are $5 million a year and the operating costs are $4 million a year. A major refit costing $2 million will be required after both the fifth and the tenth years. After 15 years, the ship is expected to be sold for scrap for $1.5 million. If the discount rate is 8%, what is the ship's NPV?

Answer 1

A	B	C	D	E	F	G	H	I	J
2
3		NPV is the present value of future cash flows less the initial investment:
4		Discount rate	8%
5
6		Cash Flow of the project can be calculated as follows:
7		Year	Initial Invenstment	Revenue	Operating costs	Refit Cost	Net Cash Flow
8		0	($9,000,000)				($9,000,000)	=SUM(D8:G8)
9		1		$5,000,000	($4,000,000)		$1,000,000
10		2		$5,000,000	($4,000,000)		$1,000,000
11		3		$5,000,000	($4,000,000)		$1,000,000
12		4		$5,000,000	($4,000,000)		$1,000,000
13		5		$5,000,000	($4,000,000)	($2,000,000)	($1,000,000)
14		6		$5,000,000	($4,000,000)		$1,000,000
15		7		$5,000,000	($4,000,000)		$1,000,000
16		8		$5,000,000	($4,000,000)		$1,000,000
17		9		$5,000,000	($4,000,000)		$1,000,000
18		10		$5,000,000	($4,000,000)	($2,000,000)	($1,000,000)
19		11		$5,000,000	($4,000,000)		$1,000,000
20		12		$5,000,000	($4,000,000)		$1,000,000
21		13		$5,000,000	($4,000,000)		$1,000,000
22		14		$5,000,000	($4,000,000)		$1,000,000
23		15		$5,000,000	($4,000,000)		$1,000,000
24
25		NPV of the project	=Present Value of future Cash Flows - Initial investment
26			=($5,000,000-$4,000,000)*(P/A,8%,15)-2,000,000*((P/F,8%,5)+(P/F,8%,10))
27			($2,728,074.68)	=(E9+F9)*PV(D4,C23,-1,0)+G13*((1/((1+D4)^5))+(1/((1+D4)^10)))+H8
28
29		Hence NPV of the project is	($2,728,074.68)
30