B-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 $500,000 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 rate is 45% 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 rating: 100% (QA)

Solution Long term weighted average cost of debt ... View the full answer