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Question

LayoutFormulas Data Review View Wrap Text General , , A., ? ?? .. Merge & Center. $. % , 0.14.00 Condition Formattin 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 $510 million to build. Assume the following additional information: . The average occupancy rate for the new ship is estimated to be 80% of capacity. There will be 300 cruise days per year. The variable expenses per passenger are estimated to The revenue per passenger is expected to be 9310 per The fixed expenses for running the ship, other than be $75 per cruise day cruise day. depreciation, are estimated to be $78,000, 000 per year The ship has a service 1ife of 10 years, with a salvage value of $85,000,000 at the end of 10 years. a. Det cruise ship. ermine the annual net cash flow from operating the . Determine the net present value of this investment. suming a 128 minimum c. Assume that carnival decided to increase its price so. that the revenue increased to $320 per passenger per cruise day. Would this allow Carnival to earn a 15s rate of ret on the cruise ship investment assuming no change in any of the other assumptions2 n NPV Carnival Cash Budget+ MacBook 80 F3 43 F7 F2 F4 F5 F6 F8

Explanation / Answer

a. Computation of annual Net Cash flow from operating Cruiseship Partular Amount Revenue $223,200,000 (3000 x 80% x 310 x 300) Less: Variable Expense $54,000,000 (3000*80%*75*300) Less: Fixed Expense $78,000,000 Annual Net Cash Flow $91,200,000 b. Computation of NPV ( 12 % Rate of Return Particular Amount Time PVAF/PVF @12% Amount Cash inflow Annual net Cash inflow $91,200,000 1-10 5.65022 $515,300,064 Salvage Value $85,000,000 10 0.32197 $27,367,450 Present Value of Cash inflow (a) $542,667,514 Cash outflow Cost of Ship $510,000,000 0 1 $510,000,000 Present Value of Cash outflow (b) $510,000,000 Net Present Value (a-b) $32,667,514 c. Computation of Rate of Return Partular Amount Revenue $238,080,000 (3000 x 80% x 310 x 320) Less: Variable Expense $54,000,000 (3000*80%*75*300) Less: Fixed Expense $78,000,000 Annual Net Cash Flow $106,080,000 Net Investment $510,000,000 Rate of Return 21% Yes , by increasing the price the rate of return is 21% which is more than expectation of 15%

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