Question

2 1000 points value: The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of $274,000 at the end of each of the next two years. At the end of the third year the company will receive payment of $635,000. Assume the IRR of this option exceeds the cost of capital The company can speed up construction by working an extra shift In this case, there will be a cash outlay of $597,000 at the end of the first year, followed by a cash payment of $635,000 at the end of the second year. Use the IRR rule to show the (approximate) range of opportunity costs of capital at which the company should work the extra shift. (Enter your answers as a percent rounded to 2 decimal places. Enter the smallest percent first.) The company should work the extra shift if the cost of capital is between % and References eBook & Resources Worksheet Dimiculty: Intermediate

Answer 1

30 Year Incremental cash flows Incremental cash flows 31 C1 $ 32 C2 $ 33 C3 $ 34 35 IRR Working 23,000$ (909,000) S 635,000$ 323,000274000-(-597000) (909,000)274000-635000 635,000 635000-0 28.86% 52.56% 36 IRR031:833IRR(@31833,0. 9)l IRR(B31:B33) 37 Cost of capital is between 28.86% and 52.56%