Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid will require a £15 million upfront investment and will generate £2.5 million in savings for Facebook at the end of first year and its savings will grow at 3% per year for every in perpetuity. The second bid requires a £10 million upfront investment and will generate £3 million in savings each year starting at the end of first year in perpetuity. Assume that the cost of capital for this investment is 8%. What are the NPV and IRR for Facebook associated with each bid. Which bid is a better deal for Facebook?
a) for the first bid, NPV= – £15m + £ 2.5m/ (8%-3%)=£ 35m
IRR: NPV= 0 = – £15m + £2.5m/(IRR-3%)
for the second bid NPV= – £10m + £3m/8%= £27.5m
IRR: NPV= 0 = – £10m + £3m/ IRR
b) For independent projects, both of bids with positive NPV and IRR are ok. For mutually exclusive projects, the first bid with higher NPV which is £35m, thus, the first bid is a better deal for Facebook. IRR are not suitable for compare with mutually exclusive projects.
This is my solution, but I don’t know the answer is right or not. So please help me to check, thank u!