Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first
Question:
Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $18 million upfront investment and will generate $20 million in savings for Facebook each year for the next 3 years. The second bid from Cisco requires a $96 million upfront investment and will generate $60 million in savings each year for the next 3 years.
a. What is the IRR for Facebook associated with eachbid? The IRR associated with the Cisco opportunity is?
b. If the cost of capital for each investment is 18%, what is the net present value (NPV) for Facebook of eachbid?
Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of thelease, Facebook will pay $21 millionupfront, and $35 million per year for the next 3 years. Facebook's savings will be the same as withCisco's original bid.
c. Including itssavings, what are Facebook's net cash flow under the leasecontract? What is the IRR of the Cisco bidnow?
d. Is this new bid a better deal for Facebook thanCisco's originalbid? Explain.