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ck myorkThe Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of$271,000 at the end of each of the next two years. At the end of the third year the company will receive payment of $645,000.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 $585,000 at the end ofthe first year followed by a cash payment of $645,000 at the end of the second year. Use the IRR rule to show the (approximate) rangeof opportunity costs of capital at which the company should work the extra 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 capital is between% and( Prev6 of 8Next>

Question
ck my
ork
The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of
$271,000 at the end of each of the next two years. At the end of the third year the company will receive payment of $645,000.
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 $585,000 at the end of
the first year followed by a cash payment of $645,000 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
( Prev
6 of 8
Next>
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ck my ork The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of $271,000 at the end of each of the next two years. At the end of the third year the company will receive payment of $645,000. 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 $585,000 at the end of the first year followed by a cash payment of $645,000 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 ( Prev 6 of 8 Next>

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check_circleAnswer
Step 1

Calculation of Range of Opportunity Cost of Capital using IRR rule:

The cash flows in the initial year or cash outlay for Year 1 and Year 2 is -$271,000 and for Year 3 is $645,000. The company has a cash outlay of $585,000 in Year 1 and $645,000 in Year 2. Using the IRR rule the incremental cash flows and the range of capital is calculated below:

Excel Spreadsheet:

C
D
1
Year
2
1
2
3
3 Initial Cash Outlay
4 Additional Cash
5 Incremental Cash Flows (S314,000
($271,000) ($271,000) $645,000
(S585,000) $645,000
$0
$916,000 (S645,000)|
Cost of Capital
6
18.77%
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C D 1 Year 2 1 2 3 3 Initial Cash Outlay 4 Additional Cash 5 Incremental Cash Flows (S314,000 ($271,000) ($271,000) $645,000 (S585,000) $645,000 $0 $916,000 (S645,000)| Cost of Capital 6 18.77%

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Step 2

Excel Workings:

...
B
D
1
Year
2
1
3
-271000-271000 |645000
-585000 645000 |0
5Incremental Cash Flows|=B4-B3 C4-C3D4-D3
|=IRR(B5:D5)
Initial Cash Outlay
3
4 Additional Cash
Cost of Capital
6
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B D 1 Year 2 1 3 -271000-271000 |645000 -585000 645000 |0 5Incremental Cash Flows|=B4-B3 C4-C3D4-D3 |=IRR(B5:D5) Initial Cash Outlay 3 4 Additional Cash Cost of Capital 6

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