OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $499 million and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $69.7 million and its cost of capital is 12.1%. a. Prepare an NPV profile of the purchase. b. Identify the IRR on the graph. c. Should OpenSeas go ahead with the purchase? d. How far off could OpenSeas's cost of capital estimate be before your purchase decision would change? a. Prepare an NPV profile of the purchase. To plot the NPV profile, we compute the NPV of the project for various discount rates and plot the curve. nillion, (Round to one decimal place.) The NPV for a discount rate of 2.0% is $ The NPV for a discount rate of 11.5% is S The NPV for a discount rate of 17.0% is S The NPV profile is: million. (Round to one decimal place.) nillion. (Round to one decimal place.) NPV Profile of Cruise Ship Investment Q a b. Identify the IRR on the graph. The approximate IRR from the graph is %. (Round your answer to one decimal place.) c. Should OpenSeas go ahead with the purchase? (Select the best choice below.) OA. No, because at a discount rate of 11.6%, the NPV is positive OB. Yes, because at a discount rate of 11.6%, the NPV is negative C. Yes, because at a discount rate of 11.6%, the NPV is positive OD. No, because at a discount rate of 11.6%, the NPV is negative d. How far off could OpenSeas's cost of capital estimate e before your purchase decision would change? (Note: Subtract the discount rate from the approximate IRR.)

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter26: Real Options

Section: Chapter Questions

Problem 3P: Wansley Lumber is considering the purchase of a paper company, which would require an initial...

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Transcribed Image Text:OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $499 million and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $69.7 million and its cost of capital is 12.1%. a. Prepare an NPV profile of the purchase. b. Identify the IRR on the graph. c. Should OpenSeas go ahead with the purchase? d. How far off could OpenSeas's cost of capital estimate be before your purchase decision would change? a. Prepare an NPV profile of the purchase. To plot the NPV profile, we compute the NPV of the project for various discount rates and plot the curve. The NPV for a discount rate of 2.0% is $ nillion. (Round to one decimal place.) million. (Round to one decimal place.) The NPV for a discount rate of 11.5% is $ The NPV for a discount rate of 17.0% is S The NPV profile is: nillion. (Round to one decimal place.) NPV Profile of Cruise Ship Investment Q Q G 300- b. Identify the IRR on the graph. The approximate IRR from the graph is *%. (Round your answer to one decimal place.) c. Should OpenSeas go ahead with the purchase? (Select the best choice below.) A. No, because at a discount rate of 11.6%, the NPV is positive B. Yes, because at a discount rate of 11.6%, the NPV is negative C. Yes, because at a discount rate of 11.6%, the NPV is positive OD. No, because at a discount rate of 11.6%, the NPV is negative d. How far off could OpenSeas's cost of capital estimate be before your purchase decision would change? (Note: Subtract the discount rate from the approximate IRR.) The cost of capital estimate can be off by%. (Round to one decimal place.)

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