Question

The engineering calculation on the telecommunication project is needed to analyze the feasibility of the project and the total value of investments. As the Project Manager, you have to do the financial analysis of your telecommunication project to get the conclusion of whether this feasible to run the project or not. You have to prove your analysis by giving the project calculation in terms of Net Present Value (NPV), Present Worth Analysis, and Break-Even Point (BEP) based on the initial investment, % of interest, and the project period are given.

The Detail Situation:

The company is considering the installation of a high-end server for handling the system with the first initial cost [check point A]. This system will save $7,500,000 per year in spare part cost, but it will incur $2,750,000 in annual operating and maintenance expenditures. The salvage value at the end of the system’s X-year [check point B] life is [check point C].

At the end of the project, the company will invest the new server for the next X upcoming year [check point B] with initial the initial cost of $50,000,000. This new system will save $8,500,000 per year in spare part cost, but it will incur $3,850,000 in annual operating and maintenance expenditures. The salvage value at the end of the system’s X-year [check point B] is negligible.

There is another option to cover the requirement by combining 2 different situations. At the first X years [check point B], the company will rent a high-end server for handling system the rent cost $5,000,000/ year. There is no budget that needs to be allocated for spare part cost, and it will incur $1,500,000 in annual operating and maintenance expenditures. In the second period, the company will invest the new server for the next X upcoming year

[check point B] with initial the initial cost of $50,000,000. This new system will save $8,500,000 per year in spare part cost, but it will incur $3,850,000 in annual operating and maintenance expenditures. The salvage value at the end of the system is negligible.

If the company’s hurdle rate (MARR) is X% per year [check point D], which scenario that should be recommended for implementation?

Group C (att.list no 7- 9):

- The first initial cost [point A] = $35,000,000

- Project duration [point B] = 8 years

- The salvage value at the end of the system’s [point C] = $2.500,000.

-  (MARR) is = 12 % per year.

*please attach .xlx if you can

Answer 1

For Scenario 1:

End of Year	Initial Cost	O&M Cost	Savings	Salvage Value	Net Cashflow	PV of Cashflow
A	B	C	D	e	F=B+C+D+E	G=F/1.12^A
0	-35,000,000.00				-35,000,000.00	-35,000,000.00
1		-2,750,000.00	7,500,000.00		4,750,000.00	4,241,071.43
2		-2,750,000.00	7,500,000.00		4,750,000.00	3,786,670.92
3		-2,750,000.00	7,500,000.00		4,750,000.00	3,380,956.18
4		-2,750,000.00	7,500,000.00		4,750,000.00	3,018,710.87
5		-2,750,000.00	7,500,000.00		4,750,000.00	2,695,277.56
6		-2,750,000.00	7,500,000.00		4,750,000.00	2,406,497.83
7		-2,750,000.00	7,500,000.00		4,750,000.00	2,148,658.77
8	-50,000,000.00	-2,750,000.00	7,500,000.00	2,500,000.00	-42,750,000.00	-17,266,008.00
9		-3,850,000.00	8,500,000.00		4,650,000.00	1,676,836.62
10		-3,850,000.00	8,500,000.00		4,650,000.00	1,497,175.55
11		-3,850,000.00	8,500,000.00		4,650,000.00	1,336,763.88
12		-3,850,000.00	8,500,000.00		4,650,000.00	1,193,539.18
13		-3,850,000.00	8,500,000.00		4,650,000.00	1,065,659.98
14		-3,850,000.00	8,500,000.00		4,650,000.00	951,482.13
15		-3,850,000.00	8,500,000.00		4,650,000.00	849,537.61
16		-3,850,000.00	8,500,000.00		4,650,000.00	758,515.73
					Total	-21,258,653.75

For Scenario 2:

End of Year	Initial Cost	Rent Cost	O&M Cost	Savings	Net Cashflow	PV of Cashflow
A	B	C	D	e	F=B+C+D+E	G=F/1.12^A
0					0.00	0.00
1		-5,000,000.00	-1,500,000.00		-6,500,000.00	-5,803,571.43
2		-5,000,000.00	-1,500,000.00		-6,500,000.00	-5,181,760.20
3		-5,000,000.00	-1,500,000.00		-6,500,000.00	-4,626,571.61
4		-5,000,000.00	-1,500,000.00		-6,500,000.00	-4,130,867.51
5		-5,000,000.00	-1,500,000.00		-6,500,000.00	-3,688,274.56
6		-5,000,000.00	-1,500,000.00		-6,500,000.00	-3,293,102.29
7		-5,000,000.00	-1,500,000.00		-6,500,000.00	-2,940,269.90
8	-50,000,000.00	-2,750,000.00	-1,500,000.00		-54,250,000.00	-21,910,665.12
9			-3,850,000.00	8,500,000.00	4,650,000.00	1,676,836.62
10			-3,850,000.00	8,500,000.00	4,650,000.00	1,497,175.55
11			-3,850,000.00	8,500,000.00	4,650,000.00	1,336,763.88
12			-3,850,000.00	8,500,000.00	4,650,000.00	1,193,539.18
13			-3,850,000.00	8,500,000.00	4,650,000.00	1,065,659.98
14			-3,850,000.00	8,500,000.00	4,650,000.00	951,482.13
15			-3,850,000.00	8,500,000.00	4,650,000.00	849,537.61
16			-3,850,000.00	8,500,000.00	4,650,000.00	758,515.73
					Total	-42,245,571.93

So as per present Worth Analysis, the NPV of Scenario B is -42,245,571.93 which is much lower than the NPV of Scenario A which is -21,258,653.75.

So scenario A should be recommended to go ahead with.

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