The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves...

80.2K

Verified Solution

Question

Finance

The Titanic Shipbuilding Company has a noncancelable contract tobuild a small cargo vessel. Construction involves a cash outlay of$268,000 at the end of each of the next two years. At the end ofthe third year the company will receive payment of $620,000. Assumethe IRR of this option exceeds the cost of capital.

The company can speed up construction by working an extra shift. Inthis case there will be a cash outlay of $580,000 at the end of thefirst year followed by a cash payment of $620,000 at the end of thesecond year. Use the IRR rule to show the (approximate) range ofopportunity costs of capital at which the company should work theextra shift. (Enter your answers as a percent rounded to 2decimal places. Enter the smallest percent first.)
The company should work the extra shift if the cost of capitalis between ___% and _%.
I know the first blank is 22.82%, I just can't figure out thesecond one.

Answer & Explanation Solved by verified expert

4.1 Ratings (713 Votes)

Cash flow for scenario 1Year 1 268000Year 2 268000Year 3 620000Cash flow for Scenario 2Year 1 580000Year 2 620000Year 3 0Now let us calculate differential of the cashflowYear 1 580000 268000 312000Year 2 620000 268000 888000Year 3 0 620000 620000Assume that IRR for differential cash flow is rSetup the equation for IRR 0 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

The Titanic Shipbuilding Company has a noncancelable contract tobuild a small cargo vessel. Construction involves a cash outlay of$268,000 at the end of each of the next two years. At the end ofthe third year the company will receive payment of $620,000. Assumethe IRR of this option exceeds the cost of capital.The company can speed up construction by working an extra shift. Inthis case there will be a cash outlay of $580,000 at the end of thefirst year followed by a cash payment of $620,000 at the end of thesecond year. Use the IRR rule to show the (approximate) range ofopportunity costs of capital at which the company should work theextra shift. (Enter your answers as a percent rounded to 2decimal places. Enter the smallest percent first.)The company should work the extra shift if the cost of capitalis between _______% and _____%.I know the first blank is 22.82%, I just can't figure out thesecond one.