Question

6-Tel, Inc. is a telecommunication services provider looking to expand to a new territory Z; it is analyzing whether it should install its own telecom towers or lease them out from a prominent tower-sharing company T-share, Inc.

Leasing out 100 towers would involve payment of $5,000,000 per year for 5 years. Erecting 100 news towers would cost $18,000,000 including the cost of equipment and installation, etc. The company has to obtain a long-term secured loan of $18 million at 5% per annum. Owning a tower has some associated maintenance costs such as security, power and fueling, which amounts to $10,000 per annum per tower.

The company's tax rat is 40% while its long-term weighted average cost of debt is 6%. The tax laws allow straight-line depreciation for 5 years. Determine whether the company should erect its own towers or lease them out.

Answer 1

The present value of leasing the towers is $19,576,000 while the present value of erecting new towers is $20,273,000. Therefore, the company should lease the towers.

Explanation: