QUESTION SIX

Riverbend is a rapidly growing biotech company that has a required rate of return of 12%. It plans to build a new facility. The building will take two years to complete. The building contractor offered Riverbend a choice of three payment plans, as follows:

Plan I Payment of 100,000 at the time of signing the contract and 5,000,000 upon completion of the building. The end of the second year is the completion date.

Plan II Payment of 1,500,000 at the time of signing the contract and 1,500,000 at the end of each of the two succeeding years.

Plan III Payment of 200,000 at the time of signing the contract and 1,400,000 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 Riverbend.

(16 marks)

2. Which payment plan should Riverbend choose? Explain. (Maximum word count: 25)

(2 marks)

3. Discuss the financial factors, other than the cost of the plan, and the non-financial factors that should be considered in selecting an appropriate payment plan (Maximum word count: 100)