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 their existing servers. Use the following facts to conduct a break-even analysis of the virtualization technology.

PLEASE SHOW HOW EACH CELL WAS OBTAINED.

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 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 Renowns 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 Renowns 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?

- 2022 64 16 12 2023 64 16 12 2024 64 16 12 Break Even Analysis for Renown Server Virtualization Variables 2021 Original physical servers 64 Physical servers after virtualization 16 Physical servers not needing replacement - 12 Annual cost of virtualization software licenses (one per physical server) $8,500 Annual cost for virtualization services (flat fee) $20,000 Onetime cost for virtualization training in 2021 $36,750 Savings on physical server maintenance per server per year $990 Savings on physical server electricity and cooling per server per year $810 Hardware replacement cost of each physical server no longer needed $6,000 Labor to procure and deploy each physical server no longer needed $1,000 NPV Rate Costs 2021 2022 2023 2024 Benefits 2021 2022 2023 2024 Net Annual Benefits Break-Even Totals Net Present Value (NPV) Internal Rate of Return (IRR) In what year will Renown break even on this project? Based on their target rate of return of 12%, should Renown go forward with this project