Question

Corporation is a rapidly growing biotech company that has a required rate of return of 14​%. It plans to build a new facility in Santa Clara County. The building will take 2 years to complete. The building contractor offered New Olgy a choice of three payment​ plans, as​ follows: LOADING...​(Click the icon to view the​ data)

Plan​ I: Payment of $325,000 at the time of signing the contract and $4,600,000 upon completion of the building. The end of the second year is the completion date.
	Plan​ II: Payment of $1,725,000 at the time of signing the contract and $1,725,000 at the end of each of the 2 succeeding years.
	Plan​ III: Payment of $350,000 at the time of signing the contract and $1,600,000 at the end of each of the 3 succeeding years.

Requirement: Using the net present value​ method, calculate the comparative cost of each of the three payment plans being considered by

New OlgyNew Olgy. 2. Which payment plan should New OlgyNew Olgy choose? Explain.

3.Discuss the financial​ factors, other than the cost of the​ plan, and the nonfinancial factors that should be considered in selecting an appropriate payment plan.

Answer 1

1	Particulars	Plan 1	Plan 2	Plan 3
	Immediate payment	325000	1725000	350000
	Payment at the end of 1st year(Discounted @14% for 1 year)		1513158	1403509
	Payment at the end of 2nd year(Discounted @14% for 2 years)	3539551	1327331	1231148
	Payment at the end of 3rd year(Discounted @14% for 3 years)			1079954
	Total outflow	3864551	4565489	4064611
2	Plan 1 should be choosen as it has lowest cost.
3	Due consideration should also be given to funds availaibily and liquidity requirements. Also the reputation of the vendor must be considered.