The Titanic Shipbuilding Company has a noncancelable contract to build a small c

Question

The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of $262,000 at the end of each of the next two years. At the end of the third year the company will receive payment of $630,000. The company can speed up construction by working an extra shift. In this case there will be a cash outlay of $570,000 at the end of the first year followed by a cash payment of $630,000 at the end of the second year. Use the IRR rule to calculate the (approximate) range of opportunity costs of capital at which the company should work the extra shift.

The costs of capital is between ____ % and ____ %

Explanation / Answer

Year

Cashflow

1

                            (262,000.00)

2

                            (262,000.00)

3

                               630,000.00

4

                            (570,000.00)

5

                               630,000.00

IRR

12.09%

The costs of capital is between __12__ % and _13___ %

Year

Cashflow

1

                            (262,000.00)

2

                            (262,000.00)

3

                               630,000.00

4

                            (570,000.00)

5

                               630,000.00

IRR

12.09%

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