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Project 3: Data Center Investment | Online Assignment Help

Your firm is considering opening a data center in Toledo. Instead of being solely a cost

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center, the CEO plans to hire a sales force in Toledo to upsell and cross sell to current

customers with data purchased from a data broker. Your firm intends purchase land in Toledo

and hire a real estate development company to construct a 15,000 square foot office property

development. The development firm has agreed to sell you the property for the current asking

price per square foot of office property in Toledo. Your firm plans to stay in the site for the next 1

20 years, and the market value of the building (and salvage value for depreciation purposes) is

expected to be 50% of the purchasing price at the end of 20 years.

Your firm will purchase servers, storage, networking switches, backup power supply

units, and thin clients for the data center that will cost $2000 per square foot and have a

depreciable salvage value of zero. However, you expect to be able to sell the scrap for 5% of

the original value. The data center will take up 50% of the office space and the sales force will

have offices in the other half of the space. The primary annual cost for the datacenter is power

consumption. Toledo Edison can provide power based on their high load commercial rate of 10

cents per kilowatt hour. Modern data centers consume 150w of power per square foot per hour.

The firm will also have to hire three IT staff at a cost of $250,000 per year for the entire staff.

Revenue generated by the data center is expected to be $2.5 million per year in the first

year. In the first five years of operation revenue is expected to grow by 2% per year. Revenue

growth will level out to 1% in year 6 through year 15. In the remaining years, revenue growth is

expected to be ­2%. The sales staff at the data center are paid solely on commission. The staff

receives 15% of total revenue as compensation. This is expected to remain stable through the

1 Loopnet has commerical real estate property asking prices by type (industrial, office space, retail) http://www.loopnet.com/Toledo_Ohio_Market­Trends?linkcode=31070

life of the project. The license for data from the data broker is expected to be $500,000 per year.

Your firm’s tax rate is 20%. Net working capital set aside for the project will be 5% of the cost of

the building and servers in the first year of the project. Net working capital will then move to 5%

of revenue and in the final year will be recovered completely.

The CFO of your firm has asked you to create a pro forma income statement and

operating, working capital, and capital expenditure cash flow estimates for the project. Your

analysis should include the NPV and IRR of the net cash flows, assuming the firm’s weighted

average cost of capital is 8%. If the project is acceptable based on the initial conditions above,

you must find three realistic changes in assumptions that will cause the project to be rejected,

and create a sensitivity table and graph around the breakpoint. If the project is unacceptable

based on the initial conditions, you must find three assumptions that will make the project

acceptable and create a sensitivity table and graph around the breakpoint.

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