Open Seas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $500 million but would operate for 20 years. Open Seas expects annual cash flows from operating the ship to be $70 million and its cost of capital is 12%.
a. Prepare an NPV profile of the purchase.
b. Identify the IRR on the graph.
c. Should Open Seas go ahead with the purchase?
d. How far off could Open Seas’ cost of capital estimate be before your purchase decision would change?
Professor Wendy Smith has been offered the following deal. A law firm would like to retain her for an upfront payment of $50,000. In return, for the next year the firm would have access to eight hours of her time every month. Smith’s rate is $550 per hour and her opportunity cost of capital is 15% per year.
What does the IRR rule advice regarding this opportunity? What about the NPV rule?
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