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AOL is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $16 million upfront investment and will generate $20 million in savings for AOL each year for the next 3 years. The second bid from Cisco requires a $96 million upfront investment and will generate $60 million in savings each year for the next 3 years.
a. What is the IRR for AOL associated with eachbid?
b. If the cost of capital for each investment is 16%,what is the net present value (NPV)of each bid?
Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of thelease, AOL will pay $27 million upfront, and $35 million per year for the next 3 . What is the IRR of the Cisco bid now?
d. What is the newNPV?
e. What should AOLdo?
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