Facebook 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 Facebook each year for the next 3 years. The second bid from Cisco requires a $92 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 17%​, 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 $27 million​ upfront, and $35 million per year for the next 3 years.​ Facebook’s savings will be the same as with​ Cisco’s original bid.

c. Including its​ savings, what are​ Facebook’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 Facebook than​ Cisco’s original​ bid? Explain.

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