Q LTD 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. A residual payment of $400,000 will secure ownership of the tower if Q LTD Decides to buy them at the end of the lease period.
Erecting 100 news towers would cost $2,000,000 including the cost of equipment and installation, etc. The company has to obtain a long-term secured loan of $2 million at 6% per annum.
Owning a tower has some associated maintenance costs such as security, power and fueling, which amounts to $1,000 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.
Make three options:
A. Purchase it with a bank loan
B. Using a Financial Lease where they would own the plant
C. Using an Operating Lease there they would not won the plant at the end.
Show following details:
1. Loan amortization schedule
2. Cash flows of three different options
3. Show the NPV profiles and show a sensitivity analysis of the outcomes of above analysis and discuss the feasibility of each financing options in different scenarios such as pessimistic, most-likely and optimistic, for variables such as cost of capital (the discount rate) and net operating cash flows.