Your company is interested in having a new facility constructed. The contractor expects that it will...
Your company is interested in having a new facility constructed. The contractor expects that it will take approximately 3 years to complete the building. The contractor has offered you three payment plans for the building. They are as follows:
|
Time |
Plan 1 |
Plan 2 |
Plan 3 |
|
Today |
$2,112,000 |
$0 |
$3,168,000 |
|
1 year from now |
$6,864,000 |
$11,484,000 |
$0 |
|
2 years from now |
$6,864,000 |
$0 |
$10,032,000 |
|
3 years from now |
$6,864,000 |
$11,484,000 |
$10,032,000 |
The CFO of your company has asked you to provide recommendation concerning which payment plan to accept. What is your recommendation? Assume your weighted-average cost of capital is 14% and you have sufficient cash on hand to make any required payments today.
Homework Answers
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| Time | Plan 1 | Plan 2 | Plan 3 | PVF 14% | Plan 1 | Plan 2 | Plan 3 |
| Today | $ 2,112,000 | $ - | $ 3,168,000 | 1.0000 | $ 2,112,000 | $ - | $ 3,168,000 |
| 1 year from now | $ 6,864,000 | $ 11,484,000 | $ - | 0.8772 | $ 6,021,053 | $ 10,073,684 | $ - |
| 2 years from now | $ 6,864,000 | $ - | $ 10,032,000 | 0.7695 | $ 5,281,625 | $ - | $ 7,719,298 |
| 3 years from now | $ 6,864,000 | $ 11,484,000 | $ 10,032,000 | 0.6750 | $ 4,633,004 | $ 7,751,373 | $ 6,771,314 |
| Net Present Value | $ 18,047,682 | $ 17,825,057 | $ 17,658,612 | ||||
| Its best to pay as per Plan 3 since NPV is lowest in this case | |||||||
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