Higa Corporation is planning to build a new facility in Regina, Saskatchewan. A local Regina contractor has offered to build the facility and has proposed two alternative payment options, as follows:
• Payment Option 1: Payment of $1,000,000 at the signing of the contract and $1,800,000 due at the end of the project in two years, or
• Payment Option 2: Payment of $500,000 due at the signing of the contract, $1,000,000 after one year, and another $1,000,000 due in two years.
Higa requires a 10 percent rate of return.
Required:
Compute the NPV for each payment option. Which payment option should Higa choose?