Corporate Finance
Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 7, Problem 7P

OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $500 million, and would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70 million {at the end of each year) and its cost of capital is 12%.

  1. a. Prepare an NPV profile of the purchase.
  2. b. Estimate the IRR (to the nearest 1%) from the graph.
  3. c. Is the purchase attractive based on these estimates?
  4. d. How far off could OpenSeas’ cost of capital be (to the nearest 1 %) before your purchase decision would change?
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