Comparison of projects, no income taxes. (CMA, adapted) New Pharm 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 Pharm a choice of three payment plans, as follows:
■ Plan I: Payment of $175,000 at the time of signing the contract and $4,700,000 upon completion of the building. The end of the second year is the completion date.
■ Plan II: Payment of $1,625,000 at the time of signing the contract and $1,625,000 at the end of each of the two succeeding years.
■ Plan III: Payment of $325,000 at the time of signing the contract and $1,500,000 at the end of each of the three succeeding years.
1. Using the net present value method, calculate the comparative cost of each of the three payment plans being considered by New Pharm.
2. Which payment plan should New Pharm 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.
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