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Facebook is considering two proposals to overhaul its networkinfrastructure. They have received two bids. The...

Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $22 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 $84 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 20%, 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 $25 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.

A. What is the IRR for Facebook associated with each bid?

  1. The IRR associated with the first bid from Huawei is __________% (Round to one decimal place)

  2. The IRR associated with Cisco opportunity is ________%

B. If the cost of capital for this investment is 20%, what is the NPV for each bid?

  1. The NPV for Huaweis bid is $________million (Round to 2 decimal places)

  2. The NPV for the Cisco opportunity is $________million

Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, Facebook will pay $25 million upfront and $35 million per year for the next 3 years, Facebooks savings will be the same as with Ciscos original bid.

C. What are Facebooks net cash flow under the lease contract? ( Round to the nearest integer)

Year 0 1 23

Cash flow )in Millions of dollars) $______ $______ $________ $______

What is the IRR of the Costco bid now?

The IRR of the Costco bid is now ________% (round to one decimal place)

d. Is this new bid a better deal for Facebook than Cisco's original bid? Explain.

Solutions

Expert Solution

A. What is the IRR for Facebook associated with each bid?

  1. The IRR associated with the first bid from Huawei is 73.50% (Round to one decimal place)
  2. The IRR associated with Cisco opportunity is 50.46%

B. If the cost of capital for this investment is 20%, what is the NPV for each bid?

  1. The NPV for Huaweis bid is $20.13 million (Round to 2 decimal places)
  2. The NPV for the Cisco opportunity is $42.39million

Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, Facebook will pay $25 million upfront and $35 million per year for the next 3 years, Facebooks savings will be the same as with Ciscos original bid.

C. What are Facebooks net cash flow under the lease contract? ( Round to the nearest integer)

Year 0 1 2 3

Cash flow Year 0 = $-25 Million

Year 1 = $25 M

Year 2 = $25 M

Year 3 = $25 M

What is the IRR of the Costco bid now?

The IRR of the Costco bid is now 83.93% (round to one decimal place)

d. Is this new bid a better deal for Facebook than​ Cisco's original​ bid? Explain.

No this is not a better deal because NPV is actually decreased from$42.39 M to $27.66 M


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