Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $24 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 $90 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 each bid? b. If the cost of capital for each investment is 15%, what is the net present value (NPV) for Facebook of each bid? Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, Facebook will pay $28 million upfront, and $35 million per year for the next 3 years. Facebook's savings will be the same as with Cisco's original bid. c. Including its savings, what are Facebook's net cash flow under the lease contract? What is the IRR of the Cisco bid now? d. Is this new bid a better deal for Facebook than Cisco's original bid? Explain.
Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $24 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 $90 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 each bid? b. If the cost of capital for each investment is 15%, what is the net present value (NPV) for Facebook of each bid? Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, Facebook will pay $28 million upfront, and $35 million per year for the next 3 years. Facebook's savings will be the same as with Cisco's original bid. c. Including its savings, what are Facebook's net cash flow under the lease contract? What is the IRR of the Cisco bid now? d. Is this new bid a better deal for Facebook than Cisco's original bid? Explain.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $24 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 $90 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 each bid?
b. If the cost of capital for each investment is 15%, what is the net present value (NPV) for Facebook of each bid?
Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, Facebook will pay $28 million upfront, and $35 million per year for the
next 3 years. Facebook's savings will be the same as with Cisco's original bid.
c. Including its savings, what are Facebook's net cash flow under the lease contract? What is the IRR of the Cisco bid now?
d. Is this new bid a better deal for Facebook than Cisco's original bid? Explain.
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The question is based on the concept of capital budgeting techniques. Net Present value (NPV) and Internal Rate of return (IRR) are two popular methods of capital budgeting .
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