Question

In: Finance

​OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $500...

​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.

Solutions

Expert Solution

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%


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