OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost

$497

million, but would operate for

20

years. OpenSeas expects annual cash flows from operating the ship to be

$71.9

million (at the end of each year) and its cost of capital is 12.5%

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.