Part A (4 Marks)

River Inc. is considering buying a new ship at the cost of $497 million. The firm wants to operate it for a period of 20 years. It is expected that the ship will earn an annual cash flow of $71.1 million and has a cost of capital of 12.5 percent.

Required:

1. Prepare the NPV profile of the investment. (1 Mark)
2. Calculate the IRR and identify it on the graph. (1 Mark)
3. Should the firm invest? (1 Mark)
4. How far could the estimated cost of capital be before the investment decision of the firm would change? (1 Mark)