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 $69.7 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%.

The NPV for a discount rates of 2.0% is how many million?

The NPV for a discount rates of 11.5% is how many million?

The NPV for a discount rates of 17.0% is how many million?

b. Identify the IRR on a graph.

The approximate IRR from the graph is what percent?

c. Is the purchase attractive based on these​ estimates? Should OpenSeas go ahead with the​ purchase?

Yes/no, because at a 12.0% discount rate, the NPV is positive/negative.

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.)

The cost of capital estimate can be off by what percent?

Answer 1

Year	cash flow	present value of cash flow = cash flow/(1+r)^n r =2%	present value of cash flow = cash flow/(1+r)^n r =11.5%	present value of cash flow = cash flow/(1+r)^n r =12%	present value of cash flow = cash flow/(1+r)^n r =17%
0	-501	-501	-501	-501	-501
1	69.7	68.33333	62.51121	62.23214	53.18987
2	69.7	66.99346	56.06387	55.56441	45.46142
3	69.7	65.67987	50.28149	49.61108	38.85592
4	69.7	64.39203	45.09551	44.29561	33.21019
5	69.7	63.12944	40.4444	39.54965	28.38477
6	69.7	61.89161	36.27301	35.31219	24.26049
7	69.7	60.67804	32.53185	31.52874	20.73546
8	69.7	59.48828	29.17654	28.15066	17.72262
9	69.7	58.32184	26.1673	25.13452	15.14754
10	69.7	57.17828	23.46843	22.44153	12.94661
11	69.7	56.05713	21.04792	20.03708	11.06548
12	69.7	54.95797	18.87706	17.89025	9.457676
13	69.7	53.88037	16.9301	15.97344	8.083483
14	69.7	52.82389	15.18395	14.262	6.90896
15	69.7	51.78813	13.61789	12.73393	5.905094
16	69.7	50.77267	12.21335	11.36958	5.047089
17	69.7	49.77713	10.95368	10.15141	4.313751
18	69.7	48.80111	9.823928	9.063759	3.686967
19	69.7	47.84422	8.810698	8.092642	3.151254
20	69.7	46.9061	7.901971	7.225574	2.693379
net present value = sum of present value of cash flow		638.6949	36.37417	19.62022	-150.772
Discount rate	NPV
2%	638.6949041
11.50%	36.37416539
12%	19.62022062
17%	-150.7719792
from the above chart it can be concluded that IRR would be more than 13% at which NPV would be zero
Yes openseas should go with the project as IRR is greater than required rate of return of 12%
IRR =Using IRR function in MS excel	IRR(P907:P927)	12.62%
The cost of capital estimate can be off by what percent	12.62-12	0.62%