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Range of opportunity costs of capital

The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of $250,000 at the end of each of the next 2 years. At the end of the third year the company will receive payment of $650,000. The company can speed up construction by working an extra shift. In this case there will be a cash outlay of $550,000 at the end of the first year followed by a cash payment of $650,000 at the end of the second year.
Show the (approximate) range of opportunity costs of capital at which the company should work the extra shift

Solution Preview

To calculate the opportunity cost, we would need to use the incremental IRR rule. Calculate the incremental cash flows of Option 2 with extra shift over Option 1. Find the IRR of the incremental cash flows. This will give the NPV=0 for ...

Solution Summary

The solution explains how to determine the range of opportunity costs of capital at which the company should work the extra shift.

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