OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $ 496 million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $ 69.6 million (at the end of each year) and its cost of capital is 12.2 %

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.

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