How would you go about analysing if you should extend the life of a Data Center or decommission it? To extend the life you will have to do a phased investment over 15 years. The capex required in total will be $29m but spread through the 15 years and the maximum outflow in one year is $4.2m in year 5. The data center currently generates $9m of revenue and $4m of FCFE per year.
I was planning on looking at IRR but as the Data center is already operational, the investment is phased and the FCFE is almost every year above the required investment it makes no sense. Any guidance would be appreciated.
At a high level, I think NPV makes sense here. Basically, if extending the life of the project doesn't result in a higher NPV than decommissioning, then you shouldn't extend. For the decommissioning scenario, I would factor in the costs to shut down + any salvage value.
Maybe you could look at roic?
You can also think of it as evaluating the incremental benefit vs the alternative. Depends on the Data center model obviously, but if you don’t invest, are you gonna see deterioration of FCFE for customers churning off + higher routine maintenance? Versus the incremental benefit to cashflow of extended life? Even the investment is phased, presumably you’d cash outflow investment before you see a delta in outcomes, so you might still be able to IRR it just to see.
Thanks very helpful. For sure, if you don't invest there are potential risks of customers churning, higher maintenance and also potential failure and downtime risks.
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