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
a) 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%.
b) Besides cost, what other factors should you take into consideration when deciding which payment plan to accept?