PREPARE A BREAK EVEN ANALYSIS

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 80 physical servers in their data center.

In 2017 virtualization software will be installed on each remaining physical server at a license cost of $7,200 per server per year.

The virtualization software provider will also provide data backup and protection services for Renowns data center at a cost of $18,000 per year.

In 2017 there will be a onetime cost of $42,000 to train Renowns IT staff on the virtualization software.

Benefits

The reduction in servers from the virtualization process is expected to save Renown $800 per server in maintenance costs each year.

The reduction in servers from the virtualization process is expected to save Renown $700 per server in electricity and cooling costs each year.

Physical servers have a limited life expectancy and must eventually be replaced so by not having to replace as many servers, the cost of the replacements no longer needed becomes a benefit for Renown. Servers have a four years life expectancy and Renown replaces 25% of their servers each year. The hardware cost to replace each physical server is $5,200.

Renown will also save on the labor cost to procure and deploy each physical server they do not need to replace which amounts to $900 per server.

Calculations

The break even analysis will cover a 4 year period from 2017-2020.

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 25%.

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 25%, should Renown go forward with this project?

Reference: Total costs for 2017 should be $214,000

Total benefits for 2018 should be $181,500

Net annual benefits for 2020 should be $17,500