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    Calculating NPV in the given case

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    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
    1
    3
    4
    5
    6
    7
    8
    9
    10
    11
    12
    13
    14
    15
    NPV

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    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.

    $2.19

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