Royal Carribean Case

Royal Carribean Case

  • Submitted By: naverno
  • Date Submitted: 02/18/2009 7:32 PM
  • Category: Business
  • Words: 290
  • Page: 2
  • Views: 379

Since the NPV of the project is positive, Royal Caribbean should go ahead with the project. I assumed that the salvage value of the ship at the end of the 20 year life period is 0. I assumed that the growth projections are realistic and there won’t be an issue of industry overcapacity. I also assumed that the fixed costs such as corporate overhead, maintenance, and administrative staff will remain the same despite inflation, unexpected cost, and other factors. The corporate overhead is particularly sensitive to changes if more ships are added. I also disregarded the sunk costs of marketing survey and research and design.

The break even capacity is around 84%. I obtained it by trying different scenarios to make the NPV of the project the smallest positive number.

Because the NPV is negative it won’t be worth investing in the project at the discount rate of 12%.
No, because the old employee will have to move from another area to this project which does not reduce the cost of administrative staff. This cost is fixed.

The salvage value of the ship is likely to be more than 0 just for the value of the scrap metal. A positive salvage value would increase the NPV of the project.
On the other hand, other potential developments can affect the NPV negatively. If the revenues are projected to grow while the initial utilization rate is 100%, the revenues per passenger have to go up. Because the ship will get older, the increase in revenue can mostly come from inflation. Also, because inflation over 20 years is very likely to happen, costs such as salaries, maintenance, corporate overhead, and marketing are likely to go up. Also, there is threat of industry overcapacity that can lower the revenues.

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