EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
expand_more
expand_more
format_list_bulleted
Videos
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?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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
EBK CORPORATE FINANCE
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...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. Should Wansley purchase the paper company? Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.arrow_forwardMason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated revenue producing lite of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?arrow_forwardGina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?arrow_forward
- Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?arrow_forwardOpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $501 million and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70.7 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? SITTE 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.)arrow_forwardOpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $499 million and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $69.6 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? ...arrow_forward
- OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $502 million and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $71.2 million and its cost of capital is 12.3%. 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.)arrow_forwardOpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $499 milion and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70.3 million and its cost of capital is 12.1% a. Prepare an NPV profile of the purchase. b. Identify the IRR on the graph. e 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)arrow_forwardb. Identify the IRR on the graph. The approximate IRR from the graph is %. (Round your answer to one decimal place.) c. Should OpenSeas go ahead with the purchase? (Select the best choice below.) O A. Yes, because at a discount rate of 11.5%, the NPV is negative. B. No, because at a discount rate of 11.5%, the NPV is positive. C. Yes, because at a discount rate of 11.5%, the NPV is positive. D. No, because at a discount rate of 11.5%, the NPV is negative. d. How far off could OpenSeas' cost of capital estimate be before your purchase decision would change? (Note: Subtract the discount rate from the approximate IRR.) The cost of capital estimate can be off by %. (Round to one decimal place.)arrow_forward
- OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $497 million, and 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 12.5%. 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?arrow_forwardcan you please find a,b,c and d?arrow_forwardOpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $503.4 million, and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $69.8 million and its cost of capital is 11.90%. a. Prepare an NPV profile of the purchase. b. Identify the IRR on the graph. c. Should OpenSeasOpenSeas proceed with the purchase? d. How far off could OpenSeasOpenSeas' cost of capital estimate be before your purchase decision would change?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
What Does ROI (Return On Investment) Really Mean?; Author: REtipster;https://www.youtube.com/watch?v=Z6ThJvNr1Dw;License: Standard Youtube License