Net Present Value Method Opulence Corporation operates several large cruise ship
ID: 2791704 • Letter: N
Question
Net Present Value Method
Opulence Corporation operates several large cruise ships. One of these ships, the Bellwether, can hold up to 3,600 passengers and cost $720 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 $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 $101,088,000 per year.
The ship has a service life of 10 years, with a residual value of $120,000,000 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 10% minimum rate of return. Use the present value tables provided above. If required, round to the nearest whole dollar.
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 0.162Explanation / Answer
a. the annual net cash flow from operating the cruise ship. Revenues 48,60,00,000 Less variable expenses 3,24,000 Fixed expenses 10,10,88,000 Annual net cash flow 38,45,88,000 b. the net present value of this investment, assuming a 10% minimum rate of return. Present value of annual net cash flows 2,36,29,08,672 Present value of residual value 4,63,20,000 Total present value 2,40,92,28,672 Less amount to be invested (72,00,00,000) Net present value 1,68,92,28,672 Initial Investment (72,00,00,000) Life of Ship (years) 10 Annual Inflow 38,45,88,000 Discount factor of 10% for 10 years 6.144 PV of the total inflow 2,36,29,08,672 Salavage value at the end of 10th year 12,00,00,000 Discount factor of 10th year 0.386 PV of the residual value 4,63,20,000 1 0.909 2 0.826 3 0.751 4 0.683 5 0.621 6 0.564 7 0.513 8 0.467 9 0.425 10 0.386 6.144