Fox Valley Healthcare Inc. is a not-for-profit organization that operates eight nursing homes and ten assisted-living facilities. The company has grown consider ably over the last three years and expects to continue to expand in the years ahead, particularly in the area of assisted-living facilities for seniors. Jim Ruffalo, president of Fox Valley, has developed a plan to add a new building for top management and the administrative staff. He has selected a building contractor, Vukacek Construction Co., and has reached agreement on the building and its construction. Vukacek is ready to start as soon as the contract is signed and will complete the work in two years.
The building contractor has offered Fox Valley a choice of three payment plans:
◆ Plan I: Payment of $240,000 on the signing of the contract and $3,600,000 at the time of completion.
◆ Plan II: Payment of $1,200,000 on the signing of the contract and $1,200,000 at the end of each of the two succeeding years. The end of the second year is the completion date.
◆ Plan III:Payment of $120,000 on the signing of the contract and $1,200,000 at the end of each of the three succeeding years. Ruffalo is not sure which payment plan he should accept. He has asked the treasurer, Lisa Monroe, for her assessment and advice. Fox Valley will finance the construction with a long-term loan and has a borrowing rate of 10%.
REQUIRED
1. Using the net present value method, calculate the comparative cost of each of the three payment plans being considered by Fox Valley Healthcare Inc.
2. Which payment plan should the treasurer recommend? Explain.
3. Discuss the financial factors, other than the cost of the plan, and nonfinancial factors that should be considered in selecting an appropriate payment plan.