Sensitivity analysis James 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 (CF0)
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$3,000
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$3,000
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Outcome
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Annual cash inflows (CF)
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Pessimistic
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$ 500
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$ 400
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Most likely
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750
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750
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Optimistic
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1,000
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1,200
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a. Determine the range of annual cash inflows for each of the two computers.
b. Construct a table similar to this for the NPVs associated with each outcome for both computers.
c. Find the range of NPVs, and subjectively compare the risks associated with purchasing these computers.