In: Accounting
Analysis 1: Renown Health Server
Virtualization
For this analysis you
are to evaluate a proposal for...
Analysis 1: Renown Health Server
Virtualization
For this analysis you
are to evaluate a proposal for Renown Medical Center to optimize
their data center by virtualizing (see chapter 5) their
existing servers. Use the following facts to conduct a break-even
analysis of the virtualization technology.
Costs
- It is estimated that virtualization will reduce the
number of servers required in Renown’s data center by a ratio
of 4 to 1. That means for every 4 physical servers running
applications, the virtualization process will enable just
1 physical server to run the same set of applications.
- Renown currently has 64 physical servers in
their data center (before the virtualization).
- In 2021, virtualization software will be installed on each
remaining physical server at a
license cost of $8,500
per server per year.
- The virtualization software provider will also provide data
backup and protection services for the whole Renown’s data center
at a cost of $20,000 per year (flat fee).
- In 2021 there will be a one-time cost of $36,750 to
train Renown’s IT staff on the
virtualization software.
Benefits
- The reduction in physical servers from the
virtualization process is expected to save Renown $990 per
server in maintenance costs each year.
- The reduction in servers from the virtualization
process is expected to save Renown
$810 per server in
electricity and cooling costs each year.
- Physical servers have a limited life expectancy and must
eventually be replaced; therefore, by not having to replace as many
servers, the cost of the replacements no longer needed
becomes a benefit for Renown. Physical servers have a four-year
life expectancy and Renown replaces 25% of their servers each
year. The hardware cost to replace each physical server is
$6,000.
- Renown will also save on the labor cost to procure and deploy
each physical server they do not need to replace which
amounts to $1,000 per server.
Calculations
The break-even
analysis will cover a 4-year period from 2021-2024. For each
year:
- Calculate the system costs.
- Calculate the system benefits.
- Calculate the net benefits of the system.
- Calculate the break-even total for the system. For the total
time period:
- Calculate the net present value (NPV) of the investment using
a rate of 12%.
- Calculate the internal rate of return (IRR).
At the bottom of your spreadsheet add
the two questions below and include your answer to them:
- In what year will Renown break even on this project?
- Based on their required rate of return of 12%, should Renown go
forward with this project?