OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $498 million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $68.2 million (at the end of each year) and its cost of capital is 11.8%

a. Prepare an NPV profile of the purchase using discount rates of, 2.0%, 11.5% and 17.0%.

b. Identify the IRR (to the nearest 1%) on a graph.

c. Is the purchase attractive based on these estimates?

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

Note:

Subtract the discount rate from the actual IRR. Use Excel to compute the actual IRR.