Carnival Corporation has recently placed into service some of the largest cruise
ID: 2379364 • Letter: C
Question
Carnival Corporation has recently placed into service some of the largest cruise ships in the world. One of these ships, the Carnival Dream, 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 at a full capacity of 3,600 passengers.
? The variable expenses per passenger are estimated to be $95 per cruise day.
? The revenue per passenger is expected to be $280 per cruise day.
? The fixed expenses for running the ship, other than depreciation, are estimated to be $65,000,000 per year.
? The ship has a service life of 10 years, with a residual value of $100,000,000 at the end of 10 years.
(a) Determine the annual net cash flow 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.
Explanation / Answer
The annual net cash flow from this cruise ship can be found by the following table:
Depreciation is not an actual cash expense, so we do not need to consider it. Unless I have missed it, I do not see any tax information given in this problem, and no probability for the amount of passengers, so I have assumed we will be operating at max capacity. To calculate the NPV of the project, I will use a financial calculator. As a check figure, my financial calculator gives an answer for the NPV of $11,650,0624.23.
To calculate this using a PV table is absolutely ridiculous.
Instead, to calculate this "by hand," we must use the formula
R x (1 - (1 + i) ^ -n) / i - intital investment
In this case, R = $134,800,000, i = 12%, n = 10, and the intial investment is $750,000,000. Just plug that in.
$134,800,000 x (1 - (1 + 0.12) ^ -10) / 0.12 - $750,000,000
= $134,800,000 x (1 - (1.12) ^ -10) / 0.12 - $750,000,000
= $134,800,000 x (1 - 0.32197) / 0.12 - $750,000,000
= $134,800,000 x (0.67803) / 0.12 - $750,000,000
= $134,800,000 x 5.65022 - $750,000,000
= $761,650,000 - $750,000,000 = $11,650,000.
We lost a little bit due to my calculator's rounding, but it's very close to what we expected to get.
If your teacher requires you to use PV tables, please let me know, and I will work the problem in that way, but it is much more tedious then the method I just showed you.
Hope that helps!