Net Present Value MethodBlue Ocean Corporation placed into service some of the largest cruise ships in the world. One of these ships can hold up to 2,500 passengers and cost $500 million to build. Assume the following additional information:There will be 300 cruise days per year operated at a full capacity of 2,500 passengers.The variable expenses per passenger are estimated to be $90 per cruise day.The revenue per passenger is expected to be $450 per cruise day.The fixed expenses for running the ship, other than depreciation, are estimated to be $69,500,000 per year.The ship has a service life of 10 years, with a residual value of $80,000,000 at the end of 10 years.Present Value of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.69430.8400.7510.7120.6580.57940.7920.6830.6360.5720.48250.7470.6210.5670.4970.40260.7050.5640.5070.4320.33570.6650.5130.4520.3760.27980.6270.4670.4040.3270.23390.5920.4240.3610.2840.194100.5580.3860.3220.2470.162Present Value of an Annuity of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83321.8331.7361.6901.6261.52832.6732.4872.4022.2832.10643.4653.1703.0372.8552.58954.2123.7913.6053.3532.99164.9174.3554.1113.7853.32675.5824.8684.5644.1603.60586.2105.3354.9684.4873.83796.8025.7595.3284.7724.031107.3606.1455.6505.0194.192 a. Determine the annual net cash flows from operating the cruise ship.Revenues$fill in the blank 1Less: Variable expensesfill in the blank 2 Fixed expensesfill in the blank 3Annual net cash flows$fill in the blank 4 b. Determine the net present value of this investment, assuming a 15% minimum rate of return. Use the present value tables above.Present value of annual net cash flows$fill in the blank 5Present value of residual valuefill in the blank 6Total present value$fill in the blank 7Initial investmentfill in the blank 8Net present value$fill in the blank 9

Net Present Value (NPV) Net present value is defined as the summation of the present value of cash…

Answered: Determine the annual net cash flows…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 11E

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Net Present Value Method

Blue Ocean Corporation placed into service some of the largest cruise ships in the world. One of these ships can hold up to 2,500 passengers and cost $500 million to build. Assume the following additional information:

There will be 300 cruise days per year operated at a full capacity of 2,500 passengers.
The variable expenses per passenger are estimated to be $90 per cruise day.
The revenue per passenger is expected to be $450 per cruise day.
The fixed expenses for running the ship, other than depreciation, are estimated to be $69,500,000 per year.
The ship has a service life of 10 years, with a residual value of $80,000,000 at the end of 10 years.

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

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

a. Determine the annual net cash flows from operating the cruise ship.

Revenues	$fill in the blank 1
Less: Variable expenses	fill in the blank 2
	Fixed expenses	fill in the blank 3
Annual net cash flows	$fill in the blank 4

b. Determine the net present value of this investment, assuming a 15% minimum rate of return. Use the present value tables above.

Present value of annual net cash flows	$fill in the blank 5
Present value of residual value	fill in the blank 6
Total present value	$fill in the blank 7
Initial investment	fill in the blank 8
Net present value	$fill in the blank 9

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