?OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will c
ID: 3366709 • Letter: #
Question
?OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $ 504 ?million, and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $ 69.3 million and its cost of capital is 11.4 %.
The NPV for a discount rate of 2.0 % is ___?
The NPV for a discount rate of 11.5 % is ___?
The NPV for a discount rate of 17.0 % is ___?
b. Identify the IRR on the graph.
The approximate IRR from the graph is ??%. (see attached graph)
c. Should OpenSeas go ahead with the? purchase????(Select the best choice? below.)
A. ?No, because at a discount rate of11.4%, the NPV is positive.
B.?Yes, because at a discount rate of 11.4%?, the NPV is positive.
C. Yes, because at a discount rate of 11.4 %, the NPV is negative.
D. No, because at a discount rate of 11.4 %, the NPV is negative.
d. How far off could? OpenSeas' cost of capital estimate be before your purchase decision would? change?
The cost of capital estimate can be off by ??%.
NPV Profile of Cruise Ship Investment 1,000 800 600 400 200 10 12 -200 Discount rate (%)Explanation / Answer
1) From the graph we can see that NPV at the discount rate of 2% is $ 620 mn as if you draw a vertical line from disc rate of 2% we intersect the y axis at a point 620
Same way for the rest
NPV for a discount rate of 11.5 % is $20 mn
NPV for a discount rate of 17 % is -$120 mn
b) As the NPV becomes 0 the graph touches the discount % at 12.5% and hence the IRR is 12.5%
c)the ans is B. Yes, because at a discount rate of 11.4%?, the NPV is positive. as we can see the graph is in the +ve region for disc value of 11.4%
d) If the cost of capital becmes 12.5% we would not purchase as at this cost the gain is 0 for us since NPV is 0 at 12.5% and hence we can conclude that at 12.5% of the cost of capital there is no deal from us.
Hope the above answer has helped you in understanding the problem. Please upvote the ans if it has really helped you. Good Luck!!
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