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 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?