Carnival Corporation has recently placed into service some of the largest cruise ships in the world. One

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Carnival Corporation has recently placed into service some of the largest cruise ships in the world. One of these ships, the Carnival Glory, can hold up to 3,000 passengers and cost $530 million to build. Assume the following additional information:

• The average occupancy rate for the new ship is estimated to be 85% of capacity.

• There will be 300 cruise days per year.

• The variable expenses per passenger are estimated to be $80 per cruise day.

• The revenue per passenger is expected to be $310 per cruise day.

• The fixed expenses for running the ship, other than depreciation, are estimated to be $80,000,000 per year.

• The ship has a service life of 10 years, with a salvage value of $90,000,000 at the end of

10 years.

a. Determine the annual net cash flow from operating the cruise ship.

b. Determine the net present value of this investment, assuming a 12% minimum rate of return. Use the present value tables provided in the chapter in determining your answer.

c. Assume that Carnival Corp. decided to increase its price so that the revenue increased to $320 per passenger per cruise day. Would this allow Carnival Corp. to earn a 15% rate of return on the cruise ship investment, assuming no change in any of the other assumptions?

Use the present value tables provided in the chapter in determining your answer.


Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Accounting

ISBN: 978-0324401844

22nd Edition

Authors: Carl S. Warren, James M. Reeve, Jonathan E. Duchac

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