Reference no: EM132725416

Question - 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 $510 million to build. Assume the following additional information:

The average occupancy rate for the new ship is estimated to be 80% of capacity.

There will be 300 cruise days per year.

The variable expenses per passenger are estimated to be $75 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 $78,000,000 per year.

The ship has a service life of 10 years, with a salvage value of $85,000,000 at the end of 10 years.

Required -

a. Determine the annual net cash flow from operating the cruise ship.

b. Determine the net present value of this investment, assuming a 12% minimum.

c. Assume that Carnival decided to increase its price so that the revenue increased to $320 per passenger per cruise day. Would this allow Carnival to earn a 15% rate of return on the cruise ship investment assuming no change in any of the other assumptions?

Use the present value tables from your textbook or from another source.