LEISURE has identified a new product and is considering whether to buy new facilities from another company for €2 million or to build the facilities to manufacture it. Building would cost the company €850,000 in the first year, and €420,000 and €350,000, respectively, in the second and third years. The incremental cash flows from the new product are expected to decline with time because of increasing competition. In the first three years the expected incremental income would be €480,000, €360,000, and €240,000, respectively, after tax.

If the company’s cost of capital is 15%, should it buy or build? Assume that the facilities can be purchased immediately but the building would require three years to complete.