Question

OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $500 million, and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $69.4 million and its cost of capital is 1 1 .8%. a. Prepare an NPV profile 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? a. Prepare an NPV profile of the purchase. To plot the NPV profile we compute the NPV of the project for various discount rates and plot the curve. The NPV for a discount rate of 2.0% is $1 million. (Round to one decimal place.)

Answer 1

		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate
		N=Year of Cash Flow
	N	Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20
Discount Rate(i)	A	Cash Flow(million dollars)	($500)	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	$69.40	SUM
2%	PV2=A/(1.02^N)	Present Value of Cash flow at 2% discount	($500)	$68.04	$66.71	$65.40	$64.11	$62.86	$61.63	$60.42	$59.23	$58.07	$56.93	$55.82	$54.72	$53.65	$52.60	$51.57	$50.55	$49.56	$48.59	$47.64	$46.70	$635
4%	PV4=A/(1.04^N)	Present Value of Cash flow at 4% discount	($500)	$66.73	$64.16	$61.70	$59.32	$57.04	$54.85	$52.74	$50.71	$48.76	$46.88	$45.08	$43.35	$41.68	$40.08	$38.54	$37.05	$35.63	$34.26	$32.94	$31.67	$443
6%	PV6=A/(1.06^N)	Present Value of Cash flow at 6% discount	($500)	$65.47	$61.77	$58.27	$54.97	$51.86	$48.92	$46.15	$43.54	$41.08	$38.75	$36.56	$34.49	$32.54	$30.70	$28.96	$27.32	$25.77	$24.31	$22.94	$21.64	$296
8%	PV8=A/(1.08^N)	Present Value of Cash flow at 8% discount	($500)	$64.26	$59.50	$55.09	$51.01	$47.23	$43.73	$40.49	$37.49	$34.72	$32.15	$29.76	$27.56	$25.52	$23.63	$21.88	$20.26	$18.76	$17.37	$16.08	$14.89	$181
10%	PV10=A/(1.1^N)	Present Value of Cash flow at 10% discount	($500)	$63.09	$57.36	$52.14	$47.40	$43.09	$39.17	$35.61	$32.38	$29.43	$26.76	$24.32	$22.11	$20.10	$18.28	$16.61	$15.10	$13.73	$12.48	$11.35	$10.32	$91
11.80%	PV11.8=A/(1.118^N)	Present Value of Cash flow at 11.8% discount	($500)	$62.08	$55.52	$49.66	$44.42	$39.73	$35.54	$31.79	$28.43	$25.43	$22.75	$20.35	$18.20	$16.28	$14.56	$13.02	$11.65	$10.42	$9.32	$8.34	$7.46	$25
14%	PV14=A/(1.14^N)	Present Value of Cash flow at 14% discount	($500)	$60.88	$53.40	$46.84	$41.09	$36.04	$31.62	$27.73	$24.33	$21.34	$18.72	$16.42	$14.40	$12.64	$11.08	$9.72	$8.53	$7.48	$6.56	$5.76	$5.05	($40)
16%	PV16=A/(1.16^N)	Present Value of Cash flow at 16% discount	($500)	$59.83	$51.58	$44.46	$38.33	$33.04	$28.48	$24.56	$21.17	$18.25	$15.73	$13.56	$11.69	$10.08	$8.69	$7.49	$6.46	$5.57	$4.80	$4.14	$3.57	($89)
18%	PV18=A/(1.18^N)	Present Value of Cash flow at 18% discount	($500)	$58.81	$49.84	$42.24	$35.80	$30.34	$25.71	$21.79	$18.46	$15.65	$13.26	$11.24	$9.52	$8.07	$6.84	$5.80	$4.91	$4.16	$3.53	$2.99	$2.53	($129)
20%	PV20=A/(1.20^N)	Present Value of Cash flow at 20% discount	($500)	$57.83	$48.19	$40.16	$33.47	$27.89	$23.24	$19.37	$16.14	$13.45	$11.21	$9.34	$7.78	$6.49	$5.41	$4.50	$3.75	$3.13	$2.61	$2.17	$1.81	($162)