OpenSeas, Inc., is evaluating the purchase of a new cruise ship. The ship would cost $500 million,
Question:
OpenSeas, Inc., is evaluating the purchase of a new cruise ship. The ship would cost $500 million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70 million and its cost of capital is 12%.
a. Prepare an NPV profile of the purchase.
b. Identify the IRR on the graph.
c. Should OpenSeas go ahead with the purchase?
d. How far off could OpenSeas’ cost of capital estimate be before your purchase decision would change?
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
Initial cost 500000000 Number of years of operation 20 Cash flows in operation 70000000 Cost of capi...View the full answer
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
Students also viewed these Corporate Finance questions
-
The Leontif Company is evaluating the purchase of a new computer for its marketing department, replacing its existing computer. The current computer is fully depreciated and has little or no resale...
-
An appliance manufacturer is considering the purchase of a new machine for stamping out sheet metal parts. If 0 (given) is the true average of the number of good parts stamped out per hour by their...
-
Your firm is currently evaluating the purchase of a new machine called a Haley Special. The Special will replace your existing machine, which has 3 years left of its 6-year useful life. The existing...
-
Two long wires are placed in the x-y plane, as shown in the figure. Each wire carries a current of 1.5 A, directed out of the page. If the distance d = 3.0 m, what is the net magnetic field due to...
-
Marsha owns a two-family condominium in southern California that she paid $140,000 for in 2000. One unit has 2,400 square feet of space, and the other has 1,600 square feet. Marsha uses the...
-
How does a partner's share of partnership liabilities affect his or her outside basis?
-
How does a company account for a change in tax rates?
-
The yearly demand for a seasonal, profitable item follows the distribution below: Demand (units) Probability 1,000 ........ .20 2,000 ........ .30 3,000 ........ .40 4,000 ........ .10 A manufacturer...
-
(Q3) Consider the following cash flows of two mutually exclusive projects. Assume the discount rate is 8 percent. (a) Based on the payback period, which project should be accepted? Year AZM Mini-SUV...
-
Jimmy owns a garden in which he has planted N trees in a row. After a few years, the trees have grown up and now they have different heights. Jimmy pays much attention to the aesthetics of his...
-
FastTrack Bikes, Inc., is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000 per year. Once in production, the bike is expected to make...
-
You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5000 and will be posted for one year. You expect that it will generate...
-
Georgetown Motorcars (GM) common stock normally sells for 19 times its earnings; that is, its P/E ratio equals 19. If GMs earnings per share are $3.70, what should be its stock price under normal...
-
Lucid Technologies has a dividend payout ratio of 60% (i.e., dividends/earnings).Its capital structure is expected to remain relatively stable for the foreseable future.Lucid's most recent net income...
-
Kent borrowed $6500 on January 11 at 12.5% exact interest he made payments of $1000 on February 16 and $1500 on March 14 find his payoff amount on April 10 according to the U.S. rule
-
An unlevered firm has a book value of equity $100 million and is considering borrowing $40 million at 8% interest rate to buy back stocks. Once the company issues the debt, it becomes a levered...
-
What are the similarities and differences among global minimum variance (GMV), risk parity (RP), and low beta portfolios? Why might these portfolios outperform (as measured by Sharpe ratio) when they...
-
(a)The beginning of year consumer price index (CPI) of Kenya and Uganda as follows: in Kenya 167 and in Uganda 158. After 2 years the CPI in Kenya is expected to be 180 while in Uganda it is expected...
-
Isabella Lopez plans to open a company that will design and manufacture accessories for smartphones. In preparing to do this, she read that having a clearly articulated business model will help all...
-
Refer to the data in QS 10-1. Based on financial considerations alone, should Helix accept this order at the special price? Explain.
-
Predict the formula of an ionic compound formed from calcium and nitrogen.
-
Bond Price Movements Bond X is a premium bond making annual payments. The bond pays a 9 percent coupon, has a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making annual...
-
Bond Price Movements Bond X is a premium bond making annual payments. The bond pays a 9 percent coupon, has a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making annual...
-
Interest Rate Risk Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 2 years to maturity, whereas Bond Dave has. 15 years to...
-
Review the balance sheet for GHI Industries as of December 31, 2023, to assess its financial performance and stability. GHI Industries Balance Sheet As of December 31, 2023 Assets Current Assets Cash...
-
Question 8 What are the journal entries for recording the sale of an investment classified as held to maturity? (Assume the value of the investment has not changed since the original purchase, Debit...
-
Case Study Chapter 1 ACG2021 Use the following information to prepare an Income Statement, a Statement of Stockholders' Equity, and a Balance Sheet. Lake City Hometown Dcor has the following account...
Study smarter with the SolutionInn App