Carnival Corporation has recently placed into service some of the largest cruise ships in the world

Carnival Corporation has recently placed into service some of the largest cruise ships in the world. One of these ships, the Carnival Breeze, can hold up to 3,600 passengers, and it can cost $750 million to build. Assume the following additional information:

• There will be 330 cruise days per year operated at a full capacity of 3,600 passengers.

• The variable expenses per passenger are estimated to be $140 per cruise day.

• The revenue per passenger is expected to be $340 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 residual value of $140,000,000 at theend of 10 years.

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 rate of return. Use the present value tables provided in the chapter in determining your answer.


Answer:
a.
 Revenues (3,600 × 330 days × $340)…………………………………………… $403,920,000
 Less: Variable expenses (3,600 × 330 days × $140)………………………… (166,320,000)
 Fixed expenses (other than depreciation)………………………………………    (80,000,000)
 Annual net cash flow………………………………………………………………… $157,600,000

b.
 Present value of annual net cash flows ($157,600,000 × 5.650)…………… $890,440,000
 Present value of residual value ($140,000,000 × 0.322)………………………     45,080,000
 Total present value………………………………………………………………… $935,520,000
 Less amount to be invested………………………………………………………   750,000,000
 Net present value…………………………………………………………………… $185,520,000