Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $ 20 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

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associated with each bid?

b. If the cost of capital for each investment is

12 %12%,

what is the net present value

(NPV)

for

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of each bid?

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

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will pay

$ 20$20

million upfront, and

$ 35$35

million per year for the next

33

years.

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

c. Including its savings, what are

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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

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than Cisco's original bid? Explain.