tnc. is operate for 20 years OpenSeas expects annual cash lows from operating th

Question

tnc. is operate for 20 years OpenSeas expects annual cash lows from operating the ship to be $70 0 milion and ts cost of a. Prepare an NP'V profle of the purchase b. Idenlily the IRR on the graph c. Should OpenSeas proceed with the purchase? d. How far off could OpenSeas cost of capital estimate be before your purchase decislon would change? a. Prepare an NPV profile of the purchase To plot the NPV profle we compute the NPV of the project for various dscount rates and plot The NPV for a adiscount rate of 20% is sümmon Round to one decimal place ) 6

Explanation / Answer

Year Cash flow (A) Discounting Factor @ 2% (B) P V of Cashflows (A*B) 0 -500 1 -     500.00 1-20 70 16.35413    1,144.79 NPV       644.79 For the year 0 the discounting factor will be 1 For calculating PVAF, use the following formula PV Annuity Factor= (1-(1+r)^-n)/r where r= discounting rate= 2% or 0.02 n= no of years= 20 Annuity Factor= ((1-(1+0.02)^-20)/0.02 = (1-(1.02)^-20))/0.02 = (1-0.672971)/0.02 = 0.327029/0.02 = 16.35413

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