Below table shows a financial model of a five year old Panamax vessel (USD millions) 5 year old Panamax 1 2 3 4 5 0

Question

Below table shows a financial model of a five year old Panamax vessel (USD millions) 5 year old Panamax 1 2 3 4 5 0 -$27.0 4.6 4.4 4.6 -2.4 -2.4 -2.5 0.0 -0.3 0.0 2.2 1.7 2.0 4.6 -2.6 0.0 2.0 4.6 -2.7 0.0 1.9 Ship investment cash-flow for Year Ship purchase price Charter income Operating expense Dry docking/special survey Ship operating cash flow Drawdown of debt Loan interest payments Loan repayments Repayment of debt on sale Residual value (ship sale) Net cash-flow Discount factor 20.0% PV of cash flows 13.5 -0.6 -0.6 -0.5 -0.7 -0.7 -0.7 0.0 0.0 0.0 0.0 0.0 0.0 -13.5 0.9 0.4 0.8 1.00 1.20 1.44 1.73 -13.50 0.74 0.28 0.47 19.0% -0.53 -0.5 -0.7 0.0 0.0 0.8 2.07 0.37 -0.5 -0.7 -10.1 37.0 27.7 2.49 11.11 IRR NPV a) Would you invest in this vessel? (5 points) b) Considering the Internal Rate of Return (IRR) is 19 %, would you invest in the vessel, if the discount factor were 19.5 %? (5 points). c) If the discount factor were 15 %, would you invest in the vessel?

Help In Homework · Accepted Answer

a) No I will not invest in this vessel because the NPV is negative. So the company will lose value with this project.Also the cost of the project is higher than the Internal rate of return. b) No, I will not invest in this vessel because the discount rate is higher than the IRR. This means that the cost of the project is higher than the returns and so the project is not worth the money. c) If the discount rate was 15%, it implies that the opportunity cost of funds is lesser than the returns from the investment. Hence I would invest in the vessel.

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Below table shows a financial model of a five year old Panamax vessel (USD millions) 5 year old Panamax 1 2 3 4 5 0 -$27

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