29 Jun Question It is 2013 . Google has invested $450 million
Question
It is 2013 . Google has invested $450 million + working capital of $50 million to convert an old paper mill in Hamina, Finland into a state-of-the-art data centre. The project has a lifespan of 10 years . The rationale for the investment is to increase capacity and position the company for a push into the cloud computing market where Amazon Web Services currently dominates.
1. Google’s sales of cloud computing services are $800 million in 2013. Sales revenue is expected to grow at 20 percent p.a. even without the new data centre.
2. It is expected that the Hamina data centre will add 3.50 percent p.a. to sales revenue. Therefore, in year 1 (2014) sales revenue would be $960 million without the new centre. With the new centre it will be 3.50 percent more, or $993.6 million. Note: this is different than simply increasing the growth rate of sales by 3.50 percent to make a total of 23.50 percent p.a. Don’t take my word for it, try it!
3. Wages are a variable cost. The data centre will employ 90 people in 2014. The wages cost will be $6,000,000 in 2014. Wages costs are expected to grow by 2 percent p.a. in each subsequent year.
4. Other variable costs associated with running the data centre will amount to $21,000,000 in 2014. These other variable costs will also grow at 2 percent p.a. in each subsequent year.
5. Fixed costs will amount to $2,000,000 in 2014. These are expected to grow by 3 percent p.a. in each subsequent year.
6. Further injections of working capital will be required in 2016 and 2019. $55,000,000 will be required in each of these years. All working capital is returned at the end of the project.
7. The depreciation rule that should be applied is ‘straight-line-to-zero’.
8. The taxation rate that should be applied throughout the analysis is the average corporate taxation rate in the United States. This is 25 percent.
9. If you record a negative EBIT in any given year, taxes should be set to $0.00 for that year.
10. The corporate finance team recommends a discount rate of 12.50 percent be used to evaluate the investment.
In Google’s assessment, the key to the project is the savings that it may be able to obtain on electricity. Data centres require a lot of electricity. In 2010, for example, Google consumed 2.26 terawatt hours of electricity (about the equivalent of annual usage of 200,000 households). In fact, in 2010, data centres run by companies like Microsoft, Amazon and Facebook were responsible for 1.5% of the world’s total electricity usage . Powering the internet consumes 10% of the world’s electricity each year . Google is a leader in renewable energy. 34% of its annual power consumption comes from renewable sources .
The data centre in Finland has a number of electricity saving features:
1. Finland has a moderate climate. Air conditioning is not usually necessary even on the hottest summer days . Of course, winter becomes very cold.
2. The facility in Hamina used to be a paper mill. When Google acquired it, the facility had a seawater intake tunnel taking in cold water from the Gulf of Finland. This now forms the heart of a seawater cooling system that further reduces the need for air conditioning units.
3. Usually, electricity usage suffers from ‘leakage’. Google’s data centre will run at 80% efficiency (only 20% ‘leakage’) versus an industry average of 40% (60% leakage) :
The standard measurement of data centre efficiency is called power usage effectiveness, or PUE. A perfect number is XXXXX meaning all the power drawn by the facility is put to use. Experts considered 2.0—indicating half the power is wasted—to be a reasonable number for a data centre. Google was getting an unprecedented 1.2.
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