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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 $97 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 10 %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 $ 25$25millionupfront, and $ 35$35million per year for the next 33years.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 newNPV?
e. What should AOLdo?
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