PROBLEM 2 Comparison of projects, no income taxes. New Tech Corp. is a rapidly growing biotech company that has a required rate of return of 8%. It plans to build a new facility in Santa Clara County. The building will take 2 years to complete. The building contractor offered New Bio a choice of three payment plans, as follows: - Plan I: Payment of $325,000 at the time of signing the contract and $4,825,000 upon completion of the building. The end of the second year is the completion date. - Plan II: Payment of $1,675,000 at the time of signing the contract and $1,675,000 at the end of each of the two succeeding years. - Plan III: Payment of $425,000 at the time of signing the contract and $1,650,000 at the end of each of the three succeeding years. Required: 1. Using the net present value method, calculate the comparative cost of each of the three payment plans being considered by New Tech. 2. Which payment plan should New Tech 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. Factors to consider, in addition to NPV, are the following: a.Financial factors include - Competing demands for cash - Availability of financing for project b. Nonfinancial factors include - Risk of building contractor not remaining solvent. Plan II exposes New Tech most if the contractor becomes bankrupt before completion because it requires more of the cash to be paid earlier. - Ability to have leverage over the contractor if quality problems arise or delays in construction occur. Plans I and III give New Tech more negotiation strength by being able to withhold sizable payment amounts if, say, quality problems arise in Year 1. - Investment alternatives available. If New Tech has capital constraints, the new building project will have to compete with other projects for the limited capital available