Carnival Corporation has recently placed into service some of the largest cruise ships in the world. One of these ships, the Carnival Glory, can hold up to 3,000 passengers and cost $530 million to build. Assume the following additional information:
• The average occupancy rate for the new ship is estimated to be 85% of capacity.
• There will be 300 cruise days per year.
• The variable expenses per passenger are estimated to be $80 per cruise day.
• The revenue per passenger is expected to be $310 per cruise day.
• The fixed expenses for running the ship, other than depreciation, are estimated to be $80,000,000 per year.
• The ship has a service life of 10 years, with a salvage value of $90,000,000 at the end of 10 years.
a. Determine the annual net cash flow from operating the cruise ship.
Revenues $
Less: Variable expenses $
Fixed expenses $
Annual net cash flow $
b. Determine the net present value of this investment, assuming a 12% minimum rate of return.
Present value of annual net cash flows $
Present value of salvage value $
Total present value $
Initial investment $
Net present value $