Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $23 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 $100 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 10%​, 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​ up front, 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.
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Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $23 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 $100 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 10%​, 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​ up front, 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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