Question

Halcyon Lines is considering the purchase of a new bulk carrier for $8.6 million. The forecasted revenues are $5.6 million a year and operating costs are $4.6 million. A major refit costing $2.6 million will be required after both the fifth and tenth years. After 15 years, the ship is expected to be sold for scrap at $2.1 million.

a. What is the NPV if the opportunity cost of capital is 10%? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

Net present value            $ ？

Answer 1

Annual net benefit ($ million) = Revenue - Operating cost = 5.6 - 4.6 = 1

NPV ($) = - 8,600,000 + 1,000,000 x P/A(10%, 15) - 2,600,000 x [P/F(10%, 5) + P/F(10%, 10)] + 2,100,000 x P/F(10%, 15)

= - 8,600,000 + 1,000,000 x 7.6061** - 2,600,000 x [0.6209** + 0.3855**] + 2,100,000 x 0.2394**

= - 8,600,000 + 7,606,100 - (2,600,000 x 1.0064) + 502,740

= - 491,160 - 2,616,640

= - 3,107,800

**From P/A and P/F Factor tables