OpenSeas, Inc., is evaluating the purchase of a new cruise ship. The ship would cost $500 million,
Question:
OpenSeas, Inc., is evaluating the purchase of a new cruise ship. The ship would cost $500 million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70 million and its cost of capital is 12%.
a. Prepare an NPV profile of the purchase.
b. Identify the IRR on the graph.
c. Should OpenSeas go ahead with the purchase?
d. How far off could OpenSeas’ cost of capital estimate be before your purchase decision would change?
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
Initial cost 500000000 Number of years of operation 20 Cash flows in operation 70000000 Cost of capi...View the full answer
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
Students also viewed these Corporate Finance questions
-
The Leontif Company is evaluating the purchase of a new computer for its marketing department, replacing its existing computer. The current computer is fully depreciated and has little or no resale...
-
An appliance manufacturer is considering the purchase of a new machine for stamping out sheet metal parts. If 0 (given) is the true average of the number of good parts stamped out per hour by their...
-
Your firm is currently evaluating the purchase of a new machine called a Haley Special. The Special will replace your existing machine, which has 3 years left of its 6-year useful life. The existing...
-
Two long wires are placed in the x-y plane, as shown in the figure. Each wire carries a current of 1.5 A, directed out of the page. If the distance d = 3.0 m, what is the net magnetic field due to...
-
Marsha owns a two-family condominium in southern California that she paid $140,000 for in 2000. One unit has 2,400 square feet of space, and the other has 1,600 square feet. Marsha uses the...
-
A lateral pnp transistor has an effective base width of 10 m (1 m = 10 4 cm). (a) If the emitter-base depletion capacitance is 2 pF in the forward-bias region and is constant, calculate the device f...
-
Imagine pushing a crate in a straight line along a surface at a steady speed of \(1 \mathrm{~m} / \mathrm{s}\). What is the time rate of change in the momentum of the crate?
-
On March 31, 2013, the Herzog Company purchased a factory complete with machinery and equipment. The allocation of the total purchase price of $1,000,000 to the various types of assets along with...
-
a) Explain the following accounting concepts: i. Business entity Revenue realization ii. Accruals iii. iv. V. Substance over form Conservatism vi. Going concern (6 Marks) b) Classify the following...
-
Ashley Stamper opened a medical practice. During July, the first month of operation, the business, titled Ashley Stamper, MD, experienced the following events: Jul. 6 Received a contribution of...
-
FastTrack Bikes, Inc., is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000 per year. Once in production, the bike is expected to make...
-
You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5000 and will be posted for one year. You expect that it will generate...
-
Is it possible to have an inverted pyramid of energy? Why or why not?
-
Answer the following regarding the undirected graph represented by the edge list in the box. 1. Which vertex or vertices are most 'popular'? 2. Which vertex or vertices have the most popular...
-
Exception Handling and Input/Output Streams Instructions: Part 1: Exception Handling (40 points) Create a Java class called TemperatureConverter that includes the following methods:...
-
Discuss the HighTower Global Solutions case study in regards to the below aspects: economic, technical, and organizational feasibility of the project. Explain how the project aligns to the...
-
Does you Use push or a pull strategy? Should they continue using the same strategy? Doo their insurance companies (name at least 2) use the same or a similar strategy? Discuss
-
Discuss your informed thoughts on how this age group's developmental stage/tasks can impact their motivation, group dynamics, communication patterns, and group cohesion.
-
Draw a graph to show the change in the land market from 1969 to 2007. Explain the effects of the moratorium on the Bethel land market. In August 1969, in Bethel, N.Y., some 400,000 people swarmed to...
-
Refer to the data in QS 10-1. Based on financial considerations alone, should Helix accept this order at the special price? Explain.
-
Predict the formula of an ionic compound formed from calcium and nitrogen.
-
Bond Price Movements Bond X is a premium bond making annual payments. The bond pays a 9 percent coupon, has a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making annual...
-
Bond Price Movements Bond X is a premium bond making annual payments. The bond pays a 9 percent coupon, has a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making annual...
-
Interest Rate Risk Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 2 years to maturity, whereas Bond Dave has. 15 years to...
-
1. How do consumers account for personal expenses in their personal financial statements? 2. What accounting principles should consumers follow when tracking their personal finances? 3. How can...
-
X company has purchased and issued materials as follows: June 1. Stock of materials 200 units at Rs. 2.50 per unit 3. Purchased 300 units at Rs. 3 per unit 7. Purchased 500 units at Rs. 4 per unit...
-
Choose two questions at the end of the assigned chapters in the Be Rich text to reflect and respond in this discussion forum. Faith Integration Book: Wiersbe, W. (1979). Be Rich: Gaining the Things...
Study smarter with the SolutionInn App