Question $12$ Sensitivity Analysis: Exam Style Question

SwiftCruz plc$,$ a company that operates cruise liners, is considering purchasing a

ready$-$made new liner for use in the Indian Ocean. The purchase cost of the liner is

expected to be $500$m$,$ payable immediately. The liner is expected to have a useful

economic life $($UEL$)$ of $40$ years, at which point it would be scrapped at a zero net

cost$.$ Capital allowances on the purchase cost of the liner are available and are

calculated using the straight$-$line method over its UEL.

The firm predicts that should the project go ahead, it could operate $20$ trips p$.$a$.$ with

an average of $2,500$ passengers per trip. In addition, the firm would expect average

revenue of $3,000$ per passenger, with the variable costs per passenger expected to

be $1,000.$ Annual scheduled maintenance and other fixed overheads would likely be

$15$m p$.$a$.$ The firm$$s marginal tax rate is $20\%,$ payable in the year it is incurred, and

its after$-$tax cost of capital is $12\%.$

Requirement

i$.$ Calculate the NPV of the project $($assume constant figures over $40$ years$).$

Work to the nearest $0\mathrm{.}1$m$.$

ii$.$ Calculate the margin of safety $($in percentage terms$)$ in relation to the annual

scheduled maintenance and other fixed overheads. Work to the nearest

$0\mathrm{.}1$m and to the nearest $0\mathrm{.}1\%(0\mathrm{.}001).$

iii. Calculate the margin of safety $($in percentage terms$)$ in relation to the

estimated number of passengers per trip. Work to the nearest $0\mathrm{.}1$m and to

the nearest $0\mathrm{.}1\%(0\mathrm{.}001).$ Hint: try $2,000$ passengers per trip.