Question
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
|
$100,000
|
$820,000
|
$500,000
|
|
1 year from now
|
$1,100,000
|
$820,000
|
$0
|
|
2 years from now
|
$1,100,000
|
$820,000
|
$1,400,000
|
|
3 years from now
|
$1,100,000
|
$820,000
|
$1,400,000
|
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 10%.