Business, 11.10.2020 01:01 22nathanieltimms

You have been assigned to manage a project to upgrade all your company's data centre servers with new models. Each new server will cost you $25,000 to purchase, and you need 10 of them in total. Each new server comes with three years' free maintenance worth $2,500/year (you'll have to pay this in the fourth and fifth years). Each new server saves you $2,000/year in electrical costs. Each new server saves you $1,000/year in air conditioning expenses.

The required Internal Rate of Return (IRR) on this project, over a five year period, is 15% above breakeven. It will take you $15,000/month for three months to install the new machines. (The old ones are scrap and have no value.) After that you have no further project expenses.

Using a discount rate of 2.5% to do the discounted cash flows, is there a case for this project (it meets or exceeds the IRR) or not?

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