chapter 26

Net Present Value Method for a Service Company Carnival (CCL) has recently placed into service some of the largest cruise ships in the world. One of these ships, the Carnival Breeze, can hold up to 3,600 passengers, which can cost $750 million to build. Assume the following additional information: There will be 340 cruise days per year operated at a full capacity of 3,600 passengers. The variable expenses per passenger are estimated to be $100 per cruise day. The revenue per passenger is expected to be $280 per cruise day. The fixed expenses for running the ship, other than depreciation, are estimated to be $90,000,000 per year. The ship has a service life of 10 years, with a residual value of $60,000,000 at the end of 10 years. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0,621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 0.233 8 0.627 9 0.467 0.404 0.327 0.592 0.424 0.361 0.284 0.194 0.386 0.322 0.247 0.162 10 0.558 Present Value of an Annuity of $1 at Compound Interest 20% Year 6% 12% 15% 10% 0.909 1 0.943 0.893 0.670 0.833 3 4 5 8 0.627 0.467 0,404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 6.210 5.335 4.968 4,487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 a. Determine the annual net cash flow from operating the cruise ship. Revenues Variable expenses Fixed expenses (other than depreciation) Annual net cash flow b. Determine the net present value of this investment, assuming a 12% minimum rate of return. Use the present value tables provided above. Present value of annual net cash flows. 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 4.212 3.791 3.605 3.353 2.991 4.917 4.355 4.111 3.785 3.326 4.564 4.160 7 5.582 4.868 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 a. Determine the annual net cash flow from operating the cruise ship. Revenues Variable expenses Fixed expenses (other than depreciation). Annual net cash flow b. Determine the net present value of this investment, assuming a 12% minimum rate of return. Use the present value tables provided above. Present value of annual net cash flows Present value of residual value Total present value Amount to be invested Net present value 3 4 5 6