Question
OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $ 496$496 million, but would operate for 2020 years. OpenSeas
OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost
$ 496$496
million, but would operate for
2020
years. OpenSeas expects annual cash flows from operating the ship to be
$ 68.6$68.6
million (at the end of each year) and its cost of capital is 11.7 %11.7%
a. Prepare an NPV profile of the purchase using discount rates of
2.0 %2.0%,
11.5 %11.5%
and
17.0 %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.
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