Evaluating Projects That Don't Directly Generate Revenue
How would one evaluate a data center build, which is meant for internal use and does not generate any direct revenue, but has opex, capex, etc. For example the large data centers that Google, FB or Apple has been building.
I could not get an IRR from the projected cash flows since they would all be negative.
Theses projects obviously have a lot of operation benefits, but are very capital intensive, so I am just trying to figure out how best to evaluate them financially.
You need to ballpark the financial benefits on your operations. Do they allow you to lower headcount or cut costs? Are they more energy efficient, if so how much will they save YoY and what is that value? What are you doing now that it will replace, what are the savings/benefits of doing it?
You need to think outside the box on things like this, and look for places where having that data center allows you to better leverage other portions of the firm to make money. Another thought would be does it speed things up or allow a better mobile technology for your sales field to become more effective/efficient? That has dollar value probably. That way if you are set on doing an IRR you can create cash flows based on the above and check it against the cost of the project to see if it makes sense.
think about it this way: if the company doesn't have this data center, it has to acquire these services from other vendors, for e.g. Amazon. Hence, you would have the costs of using an outside service as your positive cash flows.
It is an in-house vs. outsourcing problem.
Thanks. And if comparing two similar data center projects I would utilize an incremental IRR analysis?
That should do the job.
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