Question #1: As a large construction company IT manager you have been asked to d
ID: 2778537 • Letter: Q
Question
Question #1: As a large construction company IT manager you have been asked to decide if the company should invest in an upgrade to the servers that support your engineering department. If you stick with the current system, annual energy costs are $75,000, annual maintenance costs are $200,000, and the annual software licenses are $25,000 per year. For the upgrade, the investment required is $490,000 and the company’s cost of capital is 7%. The investment would cut all of your annual costs by 50% for 5 years. Include a cash flow table from your excel spreadsheet, include investments, annual costs, cash flow, and cumulative cash flow throughout the duration of 5 years. Graph your annual cash flow as a bar graph and cumulative cash flow as a line graph for this upgrade project. What is the return on investment on this upgrade project and what is the payback period? Should you do it?
Question #2: Now your boss gets excited about the cloud and says she wants you to consider signing up with a hosting service instead of buying new server equipment.
It will cost you $125,000 to scrap your existing equipment and tear out the server rooms, and cost you $235,000 per year for hosting services. Include a cash flow table from your excel spreadsheet, include investments, annual costs, cash flow, and cumulative cash flow throughout the duration of 5 years. Graph your annual cash flow as a bar graph and cumulative cash flow as a line graph on this project. Calculate the ROI and payback period for this option. How does this compare to the answer in question 1 and which of the two options would you chose?
Question #3: Calculate the NPV for each of the two proposed projects in question 1 and question 2 and compare the results. Include the table of values from your excel spreadsheet used to calculate the NPVs. Which one do you choose and why?
Explanation / Answer
Total annual savings =50% of annual costs =50%*$300,000
=$150,000.
Cumulative cash flows are as follows:
Return on investment = (Annual cash savings/Total investment)*100
=($150,000/$490,000)*100
=30.61%.
Payback period = 3years +[(40000)/(150000/12)]
=3Years and 3.20 months
Answer for question no.2:
Annual cash savings =$300,000 -$235,000.
=$65,000
Return on investment =($65,000/125,000)*100
=52%.
Payback period = 1 year+$60,000/[$65,000/12]
1 year and 11.08 months.
Answer for question no.3:
NPV of option 1:
NPV of Option 2:
From the above tables it is observed that NPV is more in the second option. As NPV is more in the case of option 2, it should be chosen.
Particulars Amount Annual energy costs $75,000.00 Annual maintenance costs $200,000.00 Annual software licenses $25,000.00 Total annual costs $300,000.00