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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

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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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