Determining the range of annual cash inflows


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.

 

Computer P

Computer Q

Initial Investment CFo

$3,000.00

$3,000.00

Outcome

Annual Cash Flows

Pessimistic

$500.00

$400.00

Most Likely

$750.00

$750.00

Optimistic

$1,000.00

$1,200.00


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.

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Finance Basics: Determining the range of annual cash inflows
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