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 $256000at the end of each of the next two years. At the end of the third year the company will receive payment of $640000. The company can speed up construction by working an extra shift. In this case there will be a cash outlay of $560000 at the end of the first year followed by a cash payment of $640000 at the end of the second year. Use irr rule to calculate the approximate range of opportunity costs of capital at which the company should work the extra shift.

Costs of capital is between___% and___%.

Explanation / Answer

  I don't know what discount rate you used to find the NPV (and thus the IRR), but generally if the IRR of any option is lower, you decline it and pick the one with higher IRR, if the two options result in an IRR that is less than the original discount rate, you reject both options.

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