Question

I can't figure out part B.

Net Present Value Method

Carnival Corporation has recently placed into service some of the largest cruise ships in the world. One of these ships can hold up to 3,600 passengers and cost $750 million to build. Assume the following additional information:

There will be 300 cruise days per year operated at a full capacity of 3,600 passengers.
The variable expenses per passenger are estimated to be $90 per cruise day.
The revenue per passenger is expected to be $450 per cruise day.
The fixed expenses for running the ship, other than depreciation, are estimated to be $100,000,000 per year.
The ship has a service life of 10 years, with a residual value of $120,000,000 at the end of 10 years.

Present Value of $1 at Compound Interest
Year        6%         10%      12%      15%      20%
1            0.943    0.909    0.893    0.870    0.833
2            0.890    0.826    0.797    0.756    0.694
3            0.840    0.751    0.712    0.658    0.579
4            0.792    0.683    0.636    0.572    0.482
5            0.747    0.621    0.567    0.497    0.402
6            0.705    0.564    0.507    0.432    0.335
7            0.665    0.513    0.452    0.376    0.279
8            0.627    0.467    0.404    0.327    0.233
9            0.592    0.424    0.361    0.284    0.194
10           0.558    0.386    0.322    0.247    0.162

Present Value of an Annuity of $1 at Compound Interest
Year        6%         10%      12%      15%      20%
1            0.943    0.909    0.893    0.870    0.833
2            1.833    1.736    1.690    1.626    1.528
3            2.673    2.487    2.402    2.283    2.106
4            3.465    3.170    3.037    2.855    2.589
5            4.212    3.791    3.605    3.353    2.991
6            4.917    4.355    4.111    3.785    3.326
7            5.582    4.868    4.564    4.160    3.605
8            6.210    5.335    4.968    4.487    3.837
9            6.802    5.759    5.328    4.772    4.031
10           7.360    6.145    5.650    5.019    4.192

a. Determine the annual net cash flows from operating the cruise ship. Enter all amounts as positive numbers.

Revenues                              $486,000,000
Less: Variable expenses                97,200,000
      Fixed expenses                   100,000,000
Annual net cash flows                 $288,800,000

b. Determine the net present value of this investment, assuming a 12% minimum rate of return. Use the present value tables above.

Present value of annual net cash flows   $1,632,008,800
Present value of residual value             120,000,000
Total present value                      $1,752,008,800
Initial investment                          750,000,000
Net present value                        $1,002,008,800

Answer 1

Net Present Value Calculation:

Estimated Net Cash Flows: 288,800,000 – 63,000,000 = 225,800,000

Year	Net Cash Flows	Present Value (12%)	Present Value of Cash Flows
1	225,800,000	0.893	201,639,400
2	225,800,000	0.797	179,962,600
3	225,800,000	0.712	160,769,600
4	225,800,000	0.636	143,608,800
5	225,800,000	0.567	128,028,600
6	225,800,000	0.507	114,480,600
7	225,800,000	0.452	102,061,600
8	225,800,000	0.404	91,223,200
9	225,800,000	0.361	81,513,800
10	225,800,000	0.322	72,707,600
10 Residual Value	120,000,000	0.322	38,640,000
Total Sum			1,314,635,800

NPV = Total Net Cash Flows – Initial Investment

NPV = 1,314,635,800 – 750,000,000 = 564,635,800.

Depreciation = (750,000,000 – 120,000,000) / 10 = 63,000,000.

Even though Depreciation is not a cash flow this should be taken for NPV calculation as it effects the decision making.