Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
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%.
- a. Prepare an
NPV profile of the purchase. - b. Estimate the
IRR (to the nearest 1%) from the 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?
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OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $500 million and will operate for 20 years. OpenSeas expects annual cash flows from
operating the ship to be $68.9 million and its cost of capital is 11.6%.
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?
ame
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 $500 million and will operate for 20 years. OpenSeas expects annual cash flows from
operating the ship to be $71.7 million and its cost of capital is 12.4%.
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?
OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $504 million and will operate for 20 years. Open Seas expects
annual cash flows from operating the ship to be $68.6 million and its cost of capital is 11.7%.
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.)
Chapter 7 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 7.1 - Explain the NPV rule for stand-alone projects.Ch. 7.1 - What does the difference between the cost of...Ch. 7.2 - Prob. 1CCCh. 7.2 - If the IRR rule and the NPV rule lead to different...Ch. 7.3 - Can the payback rule reject projects that have...Ch. 7.3 - Prob. 2CCCh. 7.4 - For mutually exclusive projects, explain why...Ch. 7.4 - What is the incremental RR and what are its...Ch. 7.5 - Prob. 1CCCh. 7.5 - Prob. 2CC
Ch. 7 - Your brother wants to borrow 10,000 from you. He...Ch. 7 - You are considering investing in a start-up...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Your firm is considering the launch of a new...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - FastTrack Bikes, Inc. is thinking of developing a...Ch. 7 - OpenSeas, Inc. is evaluating the purchase of a new...Ch. 7 - You are CEO of Rivet Networks, maker of ultra-high...Ch. 7 - You are considering an investment in a clothes...Ch. 7 - You have been offered a very long term investment...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - Prob. 13PCh. 7 - Innovation Company is thinking about marketing a...Ch. 7 - You have 3 projects with the following cash flows:...Ch. 7 - You own a coal mining company and are considering...Ch. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Prob. 19PCh. 7 - Prob. 20PCh. 7 - You are a real estate agent thinking of placing a...Ch. 7 - Prob. 22PCh. 7 - You are deciding between two mutually exclusive...Ch. 7 - You have just started your summer Internship, and...Ch. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29PCh. 7 - Prob. 30PCh. 7 - Prob. 31PCh. 7 - Prob. 32PCh. 7 - Prob. 33PCh. 7 - Orchid Biotech Company is evaluating several...
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