The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of $270,000 at the end of each of the next two years. At the end of the third year the company will receive payment of $620,000. Assume the IRR of this option exceeds the cost of capital.

Part 1:

The company can speed up construction by working an extra shift. In this case, there will be a cash outlay of $584,000 at the end of the first year, followed by a cash payment of $620,000 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 %

Part 2:

Consider the following projects:

Cash Flows ($)
Project	C0	C1
D	11,400	22,800
E	21,400	37,450

Assume that the projects are mutually exclusive and that the opportunity cost of capital is 8%.

a. Calculate the profitability index for each project. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project	Profitability Index
D
E

b-1. Calculate the profitability-index using the incremental cash flows. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Profitability-index

b-2. Which project should you choose?

	Project D
	Project E

Part 3:

Mr. Art Deco will be paid $260,000 one year hence. This is a nominal flow, which he discounts at a nominal discount rate of 9%.

PV = $260,000 / (1 + .09) = $238,532

The inflation rate is 4%.

Calculate the PV of Mr. Decos payment using the equivalent real cash flow and real discount rate. (You should get exactly the same answer as he did.) (Do not round intermediate calculations. Round your "Real cash flow" and "Present value" answers to the nearest whole dollar amount. Enter the "Real discount rate" as a percent rounded to 3 decimal places.)

Real cash flow	$
Real discount rate	%
Present value	$