Question

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

$501

​million, but would operate for

20

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

$69.5

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.

c. Is the purchase attractive based on these​ estimates?

d. How far off could​ OpenSeas' cost of capital estimate be before your purchase decision would​ change? ​(NOTE: Subtract the discount rate from the actual IRR. Use Excel to compute the actual​ IRR.)

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

FROM GRAPH, IRR IS DIFFICULT TO SAY, BEACUSE GRAPH SHOWS NEAR 12% BUT ACTUAL IRR = 12.6%

SO ANSWER FOR B = 12% [FROM LOOKING AT GRAPH]