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 3,200 passengers and it can cost $640 million to build. Assume the following additional information:

• There will be 300 cruise days per year operated at a full capacity of 3,200 passengers.
• The variable expenses per passenger are estimated to be $75 per cruise day.
• The revenue per passenger is expected to be $375 per cruise day.
• The fixed expenses for running the ship, other than depreciation, are estimated to be $74,880,000 per year.
• The ship has a service life of 10 years, with a residual value of $100,000,000 at the end of 10 years.

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

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	$fill in the blank 1
Variable expenses	fill in the blank 2
Fixed expenses (other than depreciation)	fill in the blank 3
Annual net cash flow	$fill in the blank 4

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	$fill in the blank 5
Present value of residual value	fill in the blank 6
Total present value	$fill in the blank 7
Amount to be invested	fill in the blank 8
Net present value	$fill in the blank 9