6. Net Present Value Method for a Service Company

Opulence Corporation has recently placed into service some of the largest cruise ships in the world. One of these ships, the Bellwether, can hold up to 2,500 passengers and it can cost $500 million to build. Assume the following additional information:

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

The sum of the present values of a series of equal Net cash flows to be received at fixed time intervals.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 flow from operating the cruise ship.

Revenues	$
Variable expenses
Fixed expenses (other than depreciation)
Annual net cash flow	$

b. Determine the net present value of this investment, assuming a 6% minimum rate of return. Use the present value tables provided above. If required, round to the nearest whole dollar.

Present value of annual net cash flows	$
Present value of residual value
Total present value	$
Amount to be invested
Net present value	$

• There will be 300 cruise days per year operated at a full capacity of 2,500 passengers.
• The variable expenses per passenger are estimated to be $95 per cruise day.
• The revenue per passenger is expected to be $475 per cruise day.
• The fixed expenses for running the ship, other than depreciation, are estimated to be $74,100,000 per year.
• The ship has a service life of 10 years, with a residual value of $80,000,000 at the end of 10 years.