Oregon Ducks, Inc. is considering buying licenses for 12 megahertz of wireless s

Question

Oregon Ducks, Inc. 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 $250 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, Ducks estimates annual costs of $25 million over the next 7 years and no salvage value. During the same period, the company expects to generate annual revenue of $30 million by offering television and 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 13% per year.

Explanation / Answer

Annual saving = Revenues – Annual cost = $30 million - $25 million = $5 million

Net present worth = Present value of annual saving – Acquisition cost

                              = ($5 million × 12% MARR to 7 year) - $249 million

                              = ($5 million × 4.5638) - $249 million

                              = $22.819 million - $249 million

                              = -$226.181 million

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