Net Present Value Method Carnival Corporation has recently placed into service s

Question

Net Present Value Method

Carnival Corporation 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, and it cost $750 million to build. Assume the following additional information:

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 above. If required, round to the nearest dollar.

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 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 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

Explanation / Answer

Initial Cash Flow will be $750,000,000

Year1-9 Annual Cash flow will be as follows

In Year 10 The Cash flow will be

Cash Flow from Operations 229,600,000

Add: Residual Value of Ship 140,000,000

Total Cash flow of 10th Year 369,600,000

(b)

Present Value of Cash Floww will be As under

Amount Reveniue per day $340 Variable Expenses Per day $140 Contribution Margine $200 Total Contribution for Total 330 Days for 3600 passengers ($200*3600*330) 237,600,000 Less: Fixed Cost 80,000,000 Net Cash flow 229,600,000

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