Question

A company is considering buying licenses for 12 megahertz of wireless spectrum in the 700 MHz range, which is suitable for delivering television to mobile phones. The 700 MHz signals can travel long distances and more easily penetrate walls and other obstacles. The acquisition cost is $150 million. In addition, because networks that operate in the 700 MHz range are less expensive to build than those in other portions of the spectrum, the company estimates annual costs of $15 million over the next 8 years and no salvage value. During the same period, the company expects to generate annual revenue of $18 million by offering television arid video to mobile-phone users. Calculate the net present worth of this investment and determine the acceptability of the investment if the company's minimum attractive rate of return is 15% per year.

Answer 1

Answer:

NPW = -$136.539 million

The negative net present value means that the project is not financially feasible, and therefore the company does not approve or pursue this investment.

Explanation:

Data Given:

Initial cost = $150 million

Annual cost = $15 million

Annual revenue = $18 million

salvage value = $0

Time period = 8 years

MARR = 15%

Calculate Net present worth:

NPW = -$150 million + ($18 million - $15 million) (P/A, 15%, 8)

(P/A, 15%, 8) = 4.487

NPW = -$150 million + ($3 million * 4.487)

NPW = -$150 million + $13.461 million

NPW = -$136.539 million

The negative net present value means that the project is not financially feasible, and therefore the company does not approve or pursue this investment.