Question
Leisure, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $495 million, and will operate for 20 years. Leisure expects
Leisure, Inc. is evaluating the purchase of a new cruise ship. The ship will cost
$495
million, and will operate for
20
years. Leisure expects annual cash flows from operating the ship to be
$69.4
million and its cost of capital is
11.9%.
a. Prepare an NPV profile of the purchase.
b. Identify the IRR on the graph.
c. Should
Leisures
Inc. proceed with the purchase?
d. How far off could Leasure's 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
$nothing
million. (Round to one decimal place.)The NPV for a discount rate of
11.5%
is
$nothing
million. (Round to one decimal place.)The NPV for a discount rate of
17.0%
is
$nothing
million. (Round to one decimal place.)
The NPV profile is:
NPV Profile of Cruise Ship Investment
2468101214161820-200-100 0 100 200 300 400 500 600 700 800 9001,000Discount rate (%)NPV ($ millions)
The graph shows the NPV profile of a cruise ship investment. The x-axis on the graph shows discount rate in percentage; the axis values range from 0 to 20, at intervals of 2. The y-axis on the graph shows NPV in millions of dollars; the axis values range from minus 200 to 1,000, at intervals of 100. There is a downward-sloping curve that is convex to the origin. The NPV is 0.0 comma 0.5 comma 1.0 comma 1.5 comma 2.0 comma 2.5 comma 3.0 comma 3.5 comma 4.0 comma 4.5 comma 5.0 comma 5.5 comma 6.0 comma 6.5 comma 7.0 comma 7.5 comma 8.0 comma 8.5 comma 9.0 comma 9.5 comma 10.0 comma 10.5 comma 11.0 comma 11.5 comma 12.0 comma 12.5 comma 13.0 comma 13.5 comma 14.0 comma 14.5 comma 15.0 comma 15.5 comma 16.0 comma 16.5 comma 17.0 comma 17.5 comma 18.0 comma 18.5 comma 19.0 comma 19.5 comma 20.0 when the discount rate is $ 893.0 comma $ 822.7 comma $ 757.4 comma $ 696.5 comma $ 639.8 comma $ 586.9 comma $ 537.5 comma $ 491.3 comma $ 448.2 comma $ 407.8 comma $ 369.9 comma $ 334.4 comma $ 301.0 comma $ 269.7 comma $ 240.2 comma $ 212.5 comma $ 186.4 comma $ 161.8 comma $ 138.5 comma $ 116.6 comma $ 95.8 comma $ 76.2 comma $ 57.7 comma $ 40.1 comma $ 23.4 comma $ 7.5 comma negative $ 7.5 comma negative $ 21.8 comma negative $ 35.4 comma negative $ 48.3 comma negative $ 60.6 comma negative $ 72.3 comma negative $ 83.5 comma negative $ 94.2 comma negative $ 104.4 comma negative $ 114.2 comma negative $ 123.5 comma negative $ 132.4 comma negative $ 141.0 comma negative $ 149.2 comma negative $ 157.1. The curve intercepts the y-axis and the x-axis. After intercepting the x-axis, it continues to slope downward.
b. Identify the IRR on the graph.
The approximate IRR from the graph is
nothing%.
(Round your answer to one decimal place.)
c. Should Leisure Inc. go ahead with the purchase?(Select the best choice below.)
A.Yes, because at a discount rate of
11.9%,
the NPV is negative.
B.No, because at a discount rate of
11.9%,
the NPV is negative.
C.No, because at a discount rate of
11.9%,
the NPV is positive.
D.Yes, because at a discount rate of
11.9%,
the NPV is positive.d. How far off could Leisure's 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
nothing%.
(Round to one decimal place.)
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