Question

​

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

$ 500$500

​million, and will operate for

2020

years. OpenSeas expects annual cash flows from operating the ship to be

$ 70.0$70.0

million and its cost of capital is

12.0 %12.0%.

a. Prepare an NPV profile of the purchase.

b. Identify the IRR on the graph.

c. Should OpenSeas proceed with the​ purchase?

d. How far off could​ OpenSeas' cost of capital estimate be before your purchase decision would​ change?

a. Prepare an NPV profile of the purchase.

To plot the NPV profile we compute the NPV of the project for various discount rates and plot the curve.

The NPV for a discount rate of

2.0 %2.0%

is

​$nothing

million. ​

Answer 1

Solution:-

NPV profile of the purchase -

IRR of the Project-

C. Should openseas Proceed with the purchase-

Yes, NPV is positive at cost of capital 12%.

D. The cost of capital could only be off by 13% - 12% = 1% before the investment decision changes.

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