Facebook

is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a

$ 15

million upfront investment and will generate

$ 20

million in savings for Facebook each year for the next 3 years. The second bid from Cisco requires a $ 100 million upfront investment and will generate $ 60 million in savings each year for the next 3 years.

a. What is the IRR for

Facebook

associated with each bid?

b. If the cost of capital for each investment is

18 %

what is the net present value

(NPV)

for

Facebook

of each bid?

Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease,

Facebook

will pay

$ 25

million upfront, and

$ 35

million per year for the next

3

years.

Facebook

savings will be the same as with Cisco's original bid.

c. Including its savings, what are

FacebookFacebook's

net cash flow under the lease contract? What is the IRR of the Cisco bid now?

d. Is this new bid a better deal for

FacebookFacebook

than Cisco's original bid? Explain.