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%.

a. Prepare an NPV profile of the purchase.

b. Estimate the IRR (to the nearest 1%) from the graph.

c. Is the purchase attractive based on these estimates?

d. How far off could OpenSeas’s cost of capital be (to the nearest 1%) before your purchase decision would change?

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