Use formula for NPVup

An access network upgrades from 100 Mbps to 1 Gbps can be achieved for a cost of $3600.00 per house. The upgrade is made by replacing the user’s terminal equipment inside their apartment or house and connecting it to an upgraded network device, via the optical fibre between their house and a node in their street. The additional revenue of a user with upgraded equipment is $400 per year.

In one year time from now, the upgrade will cost 2% less, i.e. $3528.00 (in current $), and each successive year after that, the cost of the upgrade reduces by a further 2% (in current $).

Assume a discount rate (nominal interest rate for borrowed money), of 5% and use a time horizon of 10 years, i.e. when calculating future costs or earning from any action, limit the number of years considered to 10, after the start of the plan/upgrade.

(a) Is it cost-effective to undertake the upgrade now?

(b) If it is not cost-effective to undertake the upgrade now, as the cost of upgrade decreases each year, assume the revenue per customer from the upgrade remains the same $400 (in current $), will it become cost-effective in the future? If so, when will it become cost-effective to upgrade a house.

(c) If it is not cost-effective to undertake the upgrade now, as the cost of upgrade decreases each year, assume the revenue per customer from the upgrade increases at 8% (in current $), will it become cost-effective in the future? If so, when will it become cost-effective to upgrade a house.