Horizon Wireless must rebuild a cell tower recently destroyed by a tornado. If m
ID: 1219938 • Letter: H
Question
Horizon Wireless must rebuild a cell tower recently destroyed by a tornado. If made of normal steel, the tower will cost $40,000 to construct and should last 18 years. Maintenance will cost $1,000 per year. If corrosion resistant steel is used, the tower will cost $50,000 to build and the annual maintenance cost will be reduced to $200 per year. Determine the IRR of building the corrosion resistant tower. If Horizon requires a return of 10% on its capital projects, which tower should they build?
Explanation / Answer
(a) IRR
With corrosion resistance, annual benefit = Reduction in maintenance cost = $(1,000 - 200) = $800
Incremental first cost = $(50,000 - 40,000) = $10,000
IRR is found using Excel built-in function: =IRR().
(b) Since incremental IRR of building the corrosion resistance tower is less than required return (4.16% < 10%), the normal steel tower should be built.
Year Cash Flow ($) 0 -10,000 1 800 2 800 3 800 4 800 5 800 6 800 7 800 8 800 9 800 10 800 11 800 12 800 13 800 14 800 15 800 16 800 17 800 18 800 IRR = 4.16%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.