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In: Finance

Problem 2 Halcyon Lines is considering the purchase of a new bulk carrier for $10 million....

Problem 2

Halcyon Lines is considering the purchase of a new bulk carrier for $10 million. The forecasted revenues are $6 million a year and the operating costs are $4 million a year. A major refit costing $3 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 $2 million. If the discount rate is 8%, what is the ship’s NPV?

Expert Solution

Cash outflow at year 0 = -10 million

Operating cash inflows from year 1 to year 5 = 6 - 4 = 2 million

Present value of cash inflow = Annuity * [1 - 1 / (1 + r)ⁿ] / r

Present value of cash inflow = 2 * [1 - 1 / (1 + 0.08)¹⁵] / 0.08

Present value of cash inflow = 2 * 8.559479

Present value of cash inflow = 17.1190

Present value of year 5 cash outflow = FV / (1 + r)ⁿ

Present value of year 5 cash outflow = 3 / (1 + 0.08)⁵

Present value of year 5 cash outflow = 3 / 1.469328

Present value of year 5 cash outflow = 2.0418

Present value of year 10 cash outflow = 3 / (1 + 0.08)¹⁰

Present value of year 10 cash outflow = 3 / 2.158925

Present value of year 10 cash outflow = 1.3896

Present value of 15th year cash inflow = FV / (1 + r)ⁿ

Present value of 15th year cash inflow = 2 / (1 + 0.08)¹⁵

Present value of 15th year cash inflow = 2 / 3.172169

Present value of 15th year cash inflow = 0.6305

NPV = Present value of cash infows - present value of cash outflows

NPV = 17.1190 + 0.6305 - 1.3896 - 2.0418 - 10

NPV = $4.32 million

jeff jeffy answered 2 months ago

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