OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $502 million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $71.1 million (at the end of each year) and its cost of capital is 12.4% 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.
OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $502 million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $71.1 million (at the end of each year) and its cost of capital is 12.4% 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.
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 9P
Related questions
Question
OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $502 million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $71.1 million (at the end of each year) and its cost of capital is 12.4%
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.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning