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​OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $...

​OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $ 501 ​million, and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $ 68.7 million and its cost of capital is 11.8 % .

a. Prepare an NPV profile of the purchase.

b. Identify the IRR on the graph.

c. Should OpenSeas proceed with the​ purchase?

d. How far off could​ OpenSeas' cost of capital estimate be before your purchase decision would​ change?

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Answer #1

a) NPV = PV of all cash inflows - PV of all cash outflows

b) IRR is the rate of return when NPV is zero. Using the graph, the IRR comes out to be 12.38%.

c) Yes, as NPV of the project is positive and IRR is greater than the cost of capital, OpenSeas should proceed with the​ purchase.

d) OpenSeas' cost of capital can max be equal to the IRR (ie 12.38%). After which, the purchase decision would​ change.

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