Stemway requires a new manufacturing facility. Management found three locations; all of which would provide needed capacity, the only difference is the price. Location A may be purchased for £500,000. Location B may be acquired with a down payment of £100,000 and annual payments at the end of each of the next twenty years of £50,000. Location C requires £40,000 payments at the beginning of each of the next twenty-five years. Assuming Stemway's borrowing costs are 8% per annum, which option is the least costly to the company?

Question

Quizplus · Accepted Answer

Location C is the least costly when considering the present value of all payments at an 8% annual discount rate. Payments at the beginning of each period are more favorable due to the time value of money, making the total cost of Location C lower when discounted back to present value terms compared to the lump sum payment for Location A and the structured payments for Location B.

Stemway Requires a New Manufacturing Facility