Question

​OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost \$500 ​million, and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70.0 million and its cost of capital is 12.0%.

Answer 1

The NPV is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV will be as follows:

= - $ 500 million + $ 70 million / 1.12¹ + $ 70 million / 1.12² + $ 70 million / 1.12³ + $ 70 million / 1.12⁴ + $ 70 million / 1.12⁵ + $ 70 million / 1.12⁶ + $ 70 million / 1.12⁷ + $ 70 million / 1.12⁸ + $ 70 million / 1.12⁹ + $ 70 million / 1.12¹⁰ + $ 70 million / 1.12¹¹ + $ 70 million / 1.12¹² + $ 70 million / 1.12¹³ + $ 70 million / 1.12¹⁴ + $ 70 million / 1.12¹⁵ + $ 70 million / 1.12¹⁶ + $ 70 million / 1.12¹⁷ + $ 70 million / 1.12¹⁸ + $ 70 million / 1.12¹⁹ + $ 70 million / 1.12²⁰

= $ 22.86 million

Since the NPV is positive, hence the firm shall make the investment

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