OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $499 million, and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $68.6 million and its cost of capital is 11.5%. 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 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% is $ million. (Round to one decimal place.) The NPV for a discount rate of 11.5% is $ million. (Round to one decimal place.) The NPV for a discount rate of 17.0% is $ million. (Round to one decimal place.) The NPV profile is: NPV Profile of Cruise Ship Investment 1,000-
OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $499 million, and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $68.6 million and its cost of capital is 11.5%. 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 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% is $ million. (Round to one decimal place.) The NPV for a discount rate of 11.5% is $ million. (Round to one decimal place.) The NPV for a discount rate of 17.0% is $ million. (Round to one decimal place.) The NPV profile is: NPV Profile of Cruise Ship Investment 1,000-
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:b. Identify the IRR on the graph.
The approximate IRR from the graph is %. (Round your answer to one decimal place.)
c. Should OpenSeas go ahead with the purchase? (Select the best choice below.)
O A. Yes, because at a discount rate of 11.5%, the NPV is negative.
B. No, because at a discount rate of 11.5%, the NPV is positive.
C. Yes, because at a discount rate of 11.5%, the NPV is positive.
D. No, because at a discount rate of 11.5%, the NPV is 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 approximate IRR.)
The cost of capital estimate can be off by
%. (Round to one decimal place.)
Transcribed Image Text:OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $499 million, and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $68.6 million and its cost of capital is 11.5%.
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% is $
million. (Round to one decimal place.)
The NPV for a discount rate of 11.5% is $
million. (Round to one decimal place.)
The NPV for a discount rate of 17.0% is $
million. (Round to one decimal place.)
The NPV profile is:
NPV Profile of Cruise Ship Investment
1,000-
900-
800-
700-
600-
500-
400-
300-
200-
100-
0-
4
8
10
12
A 16
18
20
-100-
NPV ($ millions)
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