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OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $497 million and will operate for 20 years. Open Seas
OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $497 million and will operate for 20 years. Open Seas expects annual cash flows from operating the ship to be $71.7 million and its cost of capital is 12.5% a. Prepare an NPV profile of the purchase. b. Identify the IRR on the graph, c. Should Open Seas go ahead with the purchase? d. How far off could OpenSeas'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 $ million (Round to one decimal place.) The NPV for a discount rate of 11.5% is S million. (Round to one decimal place.) The NPV for a discount rate of 17.0% is s million. (Round to one decimal place.) The NPV profile is. NPV Profile of Cruise Ship Investment 1,000- 900 800 700- 800- 500- NPV (5 milions) 400- 300- 200- 100- 0- 25 12 19 20 -100- -200- Discount rate ("%) b. Identify the IRR on the graph. The approximate IRR from the graph is %. (Round your answer to one docimal place.) c. Should Open Seas go ahead with the purchase? (Select the best choice below) O A. Yes, because at a discount rate of 12.5% the NPV is positive OB. No, because at a discount rate of 12.5%, the NPV is negative OC. Yes, because al a discount Tale of 12.5%, the NPV is negative OD. No, because at a discount rate of 12 5%, the NPV is positive d. How far off could Open Seas'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 f by % (Round to one decimal place)
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