Net Present Value Method Opulence Corporation operates several large cruise ships. One of these ships, the Bellwether, can hold up to 2,300 passengers and cost $460 million to build. Assume the following additional information: There will be 300 cruise days per year operated at a full capacity of 2,300 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 $53,820,000 per year. The ship has a service life of 10 years, with a residual value of $70,000,000 at the end of 10 years. Present Value of an Annuity of $1 at Compound Interest Present Value of $1 at Compound Interest Year Year 6% 10% 12% 15% 20% 6% 10% 12% 15% 20% 0.943 0.893 0.943 0.909 0.893 0.870 0.833 0.909 0.870 0.833 0.890 0.797 0.756 0.694 1.833 1.690 1.626 1.528 0.826 2 1.736 0.840 0.658 0.751 0.712 0.579 3 2.673 2.487 2.402 2.283 2.106 0.792 0.636 0.572 3.170 3.037 2.855 2.589 0.683 0.482 3.465 0.747 4.212 3.605 0.621 0.567 0.497 0.402 3.791 3.352 2.991 0.335 4.917 4.111 3.784 6 0.705 0.564 0.507 0.432 4.355 3.326 5.582 0.665 0.513 0.452 0.376 0.279 4.868 4.564 4.160 3.605 8 0.627 0.467 0.404 0.327 0.233 6.210 5.335 4.968 4.487 3.837 6.802 0.592 0.424 0.361 0.284 0.194 5.759 5.328 4.772 4.031 0.322 6.145 10 0.558 0.386 0.247 0.162 10 7.360 5.650 5.019 4.192 a. Determine the annual net cash flow from operating the cruise ship. 258,750,000 V Revenues Variable expenses 51,750,000 53,820,000 Fixed expenses 153,180,000 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. $ 1,127,251,620 x Present value of annual net cash flows 39,060,000 Present value of residual value 1,166,311,620 x Total present value 460,000,000 v Amount to be invested 706,311,620 x Net present value Feedback V Check My Work a. Subtract the variable expenses and fixed expenses (except depreciation) from the revenues (number of passengers x rate x number of days). b. Add the present value of the annual net cash flows (annual net cash flows multiplied by the present value of an annuity factor for 10 neriods at 60%) and the present value of the residual value Subtract the amount to be invested