AOL is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $25 million upfront investment and will generate $20 million in savings for AOL each year for the next 3 years. The second bid from Cisco requires a $90 million upfront investment and will generate $60 million in savings each year for the next 3 years.

a. What is the IRR for AOL associated with eachbid?

b. If the cost of capital for each investment is 18%,what is the net present value (NPV)of eachbid?

Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of thelease, AOL will pay $29 millionupfront, and $35 million per year for the next 3 years.AOL's savings will be the same as withCisco's original bid.

c. What is the IRR of the Cisco bidnow?

d. What is the newNPV?

e. What should AOLdo?