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Calculating NPV in the given case

Halcyon Lines is considering the purchase of a new bulk carrier for $8 million. The forecast for revenues are $5 million a year and operating costs are $4 million. A major refit costing $2 million will be required after both the fifth and tenth years. After 15 years, the ship is expected to be sold for scrap at $1.5 million. If the discount rate is 8%, what is the ship's NPV?

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Year Cash Flow Present Value
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NPV

Solution Preview

Please refer attached file for better clarity of tables.

Let us analyze cash flows associated with the project
Amount in million $
Year End Revenues Operating costs Others* Net Cash flow PV factor PV
n R O X C=R+O+X PVF=1/(1+8%)^n C*PVF
0 -8 -8 1.0000 -8.0000
1 5 -4 1 0.9259 0.9259
2 5 -4 1 0.8573 0.8573
3 5 -4 1 0.7938 0.7938
4 5 -4 ...

Solution Summary

Solution describes the steps to calculate net present value in the given case.

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