Problem: Smith Secretarial Services is considering the purchase of one of two new personal computers, P and Q. Both are expected to provide benefits over a 10-year period, and each has a required investment of $3,000. The firm uses a 10% cost of capital. Management has constructed the following table of estimates of annual cash inflows for pessimistic, most likely, and optimistic results.
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Computer P
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Computer Q
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Initial Investment CFo
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$3,000.00
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$3,000.00
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Outcome
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Annual Cash Flows
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Pessimistic
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$500.00
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$400.00
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Most Likely
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$750.00
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$750.00
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Optimistic
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$1,000.00
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$1,200.00
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1) Determine the range of annual cash inflows for each of the two computers.
2) Construct a table similar to this for the NPVs associated with each outcome for both computers.
3) Find the range of NPVs, and subjectively compare the risks associated with purchasing these computers.