Horizon Wireless must rebuild a cell tower recently destroyed by a tornado. If m

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

Solution:

NPWA = -40,000 - 1,000 (P/A, i%, 18)

NPWB = -50,000 - 200 (P/A, i%, 18)

-40,000 - 1,000 (P/A, i%, 18) = -50,000 - 200 (P/A, i%, 18)

10,000 - 800 (P/A, i%, 20) = 0

(P/A, i%, 20) = 10,000 / 800 = 12.5

Using interpoltaion, gives i = 4.95%

Select project A

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