Global Atlantic, Inc. is a telecommunication firm looking to expand to a new territory and it is analyzing whether it should install its own communication towers or lease them out from a prominent tower-sharing company XYZ Telecom, 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 4.75% per annum.
Owning a tower has some associated maintenance costs such as security, power and fueling, which amounts to $12,000 per annum per tower.
The company’s tax rate is 32% while its long-term weighted average cost of debt is 5.5%. The tax laws allow straight-line depreciation for 5 years.
Determine whether the company should erect its own towers or lease them out.