Analysis 1: Renown Health Server Virtualization For this analysis you are to evaluate a proposal for Renown Medical Center to optimize its 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 Renowns 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 2020, virtualization software will be installed on each remaining physical server at a license cost of $8,510 per server per year.

The virtualization software provider will also provide data backup and protection services for the whole Renowns data center at a cost of $20,050 per year (flat fee).

In 2020 there will be a one-time cost of $40,000 to train Renowns IT staff on the virtualization software.

Benefits

The reduction in physical servers from the virtualization process is expected to save Renown $1000 per server in maintenance costs each year.

The reduction in servers from the virtualization process is expected to save Renown $800 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 $955 per server.

Calculations The break-even analysis will cover a 4-year period from 2020-2023.

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?

Deliverables

Construct both analyses in a single Excel file with each analysis in its own worksheet and label the worksheets appropriately.

Use a clearly defined list of variables. A variables list will allow someone else to adjust the variables to see the effect of those adjustments on the analysis results without having to change any formulas.

Use formulas when calculations are required. Do not just figure them out offline and then enter the totals in the spreadsheet.

Your formulas should also be constructed so that it is possible to extend the analysis to include additional years simply by copying and pasting the formulas from the last column into adjacent columns. This will require the use of absolute cell referencing.

Use conditional formatting for the net annual benefits, break-even calculations, and NPV so that positive numbers are highlighted in green and negative numbers are highlighted in red.