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Determine whether the company should erect its own towers

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Question - RIL 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 PEL-share, Inc.

Leasing out towers would involve payment of equated lease rental Rs5,000,000 per year for 5 years. Erecting new towers would cost in TOTAL of Rs 18,000,000 including the cost of equipment and installation, etc. The company has to obtain a long-term secured loan of Rs18,000,000 at 15% per annum repayable in 5 equated installments.

Owning a tower has some associated maintenance costs such as security, power and fueling, which amounts to Rs 10,000 per annum.

The company's tax rate is 40% while its long-term weighted average cost of capital is 6%. The tax laws allow straight-line depreciation for 5 years.

1) Determine whether the company should erect its own towers or lease them out.

2) You are required to evaluate and suggest the Management what should be the best course of action.

Reference no: EM133183789

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