Question

​OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $499 ​million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $71.3 million​ (at the end of each​ year) and its cost of capital is 12.5%

a. Prepare an NPV profile of the purchase using discount rates of 2.0%​, 11.5% and 17.0%.

b. Identify the IRR on a graph.

c. Is the purchase attractive based on these​ estimates?

d. How far off could​ OpenSeas' cost of capital estimate be before your purchase decision would​ change? ​(NOTE: Subtract the discount rate from the actual IRR. Use Excel to compute the actual​ IRR.)

Answer 1

		Millions
Cost	Year 0	-499.0
Annual CFs	Years 1 - 20	71.3
Year 1		71.3
year 2		71.3
Year 3		71.3
Year 4		71.3
Year 5		71.3
Year 6		71.3
Year 7		71.3
Year 8		71.3
Year 9		71.3
Year 10		71.3
Year 11		71.3
Year 12		71.3
Year 13		71.3
Year 14		71.3
Year 15		71.3
Year 16		71.3
Year 17		71.3
Year 18		71.3
Year 19		71.3
Year 20		71.3
Periods		20
COC		12.50%

PV

$17.31

Formula used:

=PV(COC,Periods,-Annual CFs)+Cost

a.

b.

The IRR is the point before NPV becomes zero. In this case, the IRR is the point where the Orange line and the Blue line cross (~13%).

c.

Yes, given that NPV is positive, the purchase is attractive.

d.

IRR = 13.1%

Formula used: =IRR(Cost:CFs (20 years))