Question

A cruise ship company is considering the purchase of 3 large ships for a total cost of $2,500,000. The company is also considering the purchase of 5 small ships for a total cost of $1,400,000. Both fleets would have estimated useful lives of 20 years. The discount rate for both alternatives is 9% Information regarding these two alternatives is as follows: 3 large ships 5 small ships Annual revenues (accrued) $500,000 $380,000 Annual expenses (accrued) $200,000 $180,000 Annual cash inflows $550,000 $430,000 Annual cash outflows $222,250 $206,350 Estimated salvage value $500,000 $0 The net present value of the purchase of the 3 large ships is: Select one: a. $3,081,097 b. None of the above c. $581,097

Question 8 t The profitability index of the purchase of the 3 large ships is: Select one: a. .46 b. 1.46 c. 3.0 d. None of the above Question 9 Not yet answered Marked out of 2.00 Not flaggedFlag question Question text The annual rate of return for the 3 large ships is: Select one: a. 0% b. 5% c. 12% d. 20%

Question 10 The internal rate of return for the 3 large ships is estimated to be 12%. True or False? Select one: True False

Question 11 a 7 year discounted payback threshold, the company would accept the purchase of the 3 large ships. Select one: True False

Question 12 a 7 year simple payback threshold, the company would accept the purchase of the 5 small ships. True or False? Select one: True False

Answer 1

Required 7

Years	Cashflows	Discount factor @ 9%	Present value
0	$ (2,500,000)	1.00000	$ (2,500,000)
1-20	$        327,750	9.12855	$    2,991,882
20	$        500,000	0.17843	$          89,215
NPV	$        581,097

Thus the answer is c) $581,097

Required 8

Years	Cashflows	Discount factor @ 9%	Present value
0	$ (1,400,000)	1.00000	$ (1,400,000)
1-20	$        223,650	9.12855	$    2,041,600

Profitability Index of the 5 small ships = Pv of Cash inflows / PV of cash outflows

= $,2041,600 / $1,400,000

= 1.46

Thus, the answer is b) 1.46

Required 9

Annual rate of return = Annaul income / Initial outflow

= ($500,000 - $300,000) / $2,500,000 * 100

= 12%

Thus the answer is c. 12%

Required 10.

Using Excel, IRR of the 3 large ship is = 12%

Thus the answer is True

Required 11

Year	Cash flow	Discount rate @ 9%	Discounted cashflow	Cummulative cashflow
1	$         327,750	0.917431	$         300,688	$         300,688
2	$         327,750	0.841680	$         275,861	$         576,549
3	$         327,750	0.772183	$         253,083	$         829,632
4	$         327,750	0.708425	$         232,186	$     1,061,818
5	$         327,750	0.649931	$         213,015	$     1,274,833
6	$         327,750	0.596267	$         195,427	$     1,470,260
7	$         327,750	0.547034	$         179,290	$     1,649,550

Since cummulative discounted cashflow in a 7 year discounted payback threshold does not exceed the initial cost of $2,500,000, the company would not accept the purchase of the 3 large ships.

Thus, the answer is False.

Required 12

Year	Cash flow	Cummulative cashflow
1	$         223,650	$        223,650
2	$         223,650	$        447,300
3	$         223,650	$        670,950
4	$         223,650	$        894,600
5	$         223,650	$    1,118,250
6	$         223,650	$    1,341,900
7	$         223,650	$    1,565,550

Since cummulative cashflow in a 7 year simple payback threshold exceeds the initial cost of $1,400,000, the company would accept the purchase of the 5 small ships.

Thus, the answer is True

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