Question

Solve the following math. ( with all supporting calculations) BELL service provider now expands to a new business in Prince Edward Island. The company have two options one to install its new set up of equipment in Price Edward Island or having other options to share the telecommunication facility to Xerox over there through lease terms. The annual lease payment will be CAD 6000000 per year for 6 years period. Building new set up over there will cost CAD16,000,000 including the cost of equipment and installation, etc. The company have a plan to take this loan at 5% interest from BMO. Having this set up has some related maintenance costs such as security, power and fueling, which amounts to CAD 1500,000 per annum per tower. The tax rate is 35% par year as well as its long-term weighted average cost of debt is 6%. The tax laws allow straight-line depreciation for 6 years. Determine whether the BELL Service provider should create its own set up or lease them out.

Answer 1

To determine if BELL Service provider should create its own setup or lease them out, we compare the costs and benefits of each option. By calculating the present value of each option, we can determine the financially feasible choice.

Step-by-step explanation:

To determine whether BELL Service provider should create its own set up or lease them out, we need to compare the costs and benefits of each option.

If BELL chooses to install its own setup in Prince Edward Island, the total cost would be CAD16,000,000 for equipment and installation, plus CAD1500,000 per annum per tower for maintenance costs. BELL would also need to take a loan from BMO at 5% interest. The tax rate is 35% per year, and the long-term weighted average cost of debt is 6%.

If BELL chooses to lease the telecommunication facility to Xerox, the annual lease payment would be CAD6,000,000 per year for 6 years.

To make the decision, we need to calculate the present value (PV) of each option and compare them. The option with the lower PV would be the more financially feasible choice.