Question

OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $500 million and would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70 million (at the end of each year) and its cost of capital is 12%.

Show your calculations and answer the following questions

Calculate the NPV of the project if the cost of capital is 12%

1. Calculate the NPV of the project if the cost of capital is 12%

2. Is the purchase an attractive investment?

3. Would your answer change if the cost of capital was 13%?

Answer 1

Answer:
Calculation of NPV of new cruise ship
Formula will will use here
NPV =	Present value of Cash inflows - Initial cost			NPV at 13%
Initial cost =	500.00				Initial cost =	500.00
Year	Cash Inflows	Present value factor @ 12%	Present value of cash inflows		Year	Cash Inflows	Present value factor @ 13%	Present value of cash inflows
1	70.00	0.89286	62.50		1	70.00	0.88496	61.95
2	70.00	0.79719	55.80		2	70.00	0.78315	54.82
3	70.00	0.71178	49.82		3	70.00	0.69305	48.51
4	70.00	0.63552	44.49		4	70.00	0.61332	42.93
5	70.00	0.56743	39.72		5	70.00	0.54276	37.99
6	70.00	0.50663	35.46		6	70.00	0.48032	33.62
7	70.00	0.45235	31.66		7	70.00	0.42506	29.75
8	70.00	0.40388	28.27		8	70.00	0.37616	26.33
9	70.00	0.36061	25.24		9	70.00	0.33288	23.30
10	70.00	0.32197	22.54		10	70.00	0.29459	20.62
11	70.00	0.28748	20.12		11	70.00	0.26070	18.25
12	70.00	0.25668	17.97		12	70.00	0.23071	16.15
13	70.00	0.22917	16.04		13	70.00	0.20416	14.29
14	70.00	0.20462	14.32		14	70.00	0.18068	12.65
15	70.00	0.18270	12.79		15	70.00	0.15989	11.19
16	70.00	0.16312	11.42		16	70.00	0.14150	9.90
17	70.00	0.14564	10.20		17	70.00	0.12522	8.77
18	70.00	0.13004	9.10		18	70.00	0.11081	7.76
19	70.00	0.11611	8.13		19	70.00	0.09806	6.86
20	70.00	0.10367	7.26		20	70.00	0.08678	6.07
Total	522.86		Total	491.73
NPV of new cruise ship				NPV of new cruise ship
Present value of cash inflows	522.86			Present vallue of cash inflows	491.73
Less: Initial cost		500.00			Less: Initial cost		500.00
NPV		22.86			NPV		-8.27
The purchase is an attractive investment			At @13%, the purchase is not an attractive investment due to Negative NPV