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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Net present value method

Carnival Corporation has recently placed into service some of the largest cruise ships in theworld. One of these ships can hold up to 3.600 passengers and cost $750 million to build.

Assume the following additional information:

• There will be 300 cruise days per year operated aa full capacity of 3.600 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$100,000,000 per year.

. The ship has a service life of 10 years, with a residual value of $120,000,000 at the end of10 years.

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

b. Determine the net present value of this investment, assuming a 12% minimum rate of return.

Use the present value tables provided in the chapter in determining your answer.

To determine

(a)

Concept introduction:

Net present value method:

It is a method of determining the present value of cash flows over the period by the multiplying the cash flows with the discounting factor of the required rate.

To compute:

The annual net cash inflow from the ship.

Explanation

The revenue from each passenger is $450 per cruise day and the ship is operated for 300 cruise per day in year at full capacity of 3600 passengers. The variable cost is $90 per cruise day and fixed expense is $100,000,000.

  Total inflow from passengers=$450×300×3600=$486,000,000Total cost incurred=(

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