In: Finance
OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost
$500 million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be
$70.0 million (at the end of each year) and its cost of capital is 12.0%
a. Prepare an NPV profile of the purchase using discount rates of 2.0%, 11.5% and 17.0%.
b. Identify the IRR on a graph.
a]
NPV = sum of present values of all cash flows
present value of each cash flow = cash flow / (1 + cost of capital)n
where n = number of years after which the cash flow occurs
b]
IRR is the cost of capital where the NPV is zero, i.e. where the NPV profile intersects the x-axis.
IRR is approximately 13%