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1.AOL is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $19 million upfront investment and will generate $20 million in savings for AOL each year for the next 33 years. The second bid from Cisco requires a $93 million upfront investment and will generate $60 million in savings each year for the next 33 years. a. What is the IRR for AOL associated with eachbid? b. If the cost of capital for each investment is 10%, 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 $21 millionupfront, and $35 million per year for the next 33 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 new NPV? e. What should AOLdo?

2. PisaPizza, a seller of frozenpizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $ 17$17 million per year. While many of these sales will be to newcustomers, Pisa Pizza estimates that 27 %27% will come from customers who switch to thenew, healthier pizza instead of buying the original version.

a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the newpizza?

b. Suppose that 61 %61% of the customers who will switch from PisaPizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in thiscase?

3. You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $ 9.7million. Investment A will generate $ 1.85million per year(starting at the end of the firstyear) in perpetuity. Investment B will generate $ 1.57million at the end of the firstyear, and its revenues will grow at 2.2 %per year for every year after that.

a. Which investment has the higherIRR?

b. Which investment has the higher NPV when the cost of capital is 6.3 %?