OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $498 million and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70.1 million and its cost of capital is 12.0%. 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 $ million. (Round to one decimal place.)

OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $498 million and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70.1 million and its cost of capital is 12.0%. 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 $ million. (Round to one decimal place.)

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PA: Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated...

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OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $502 million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $71.1 million (at the end of each year) and its cost of capital is 12.4% a. Prepare an NPV profile of the purchase using discount rates of 2.0%, 11.5% and 17.0%. b. Identify the IRR (to the nearest 1%) on a graph. c. Is the purchase attractive based on these estimates? d. How far off could OpenSeas? cost of capital be (to the nearest 1%) before your purchase decision would change?Note: Subtract the discount rate from the actual IRR. Use Excel to compute the actual IRR.
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