Problem:

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. Computer P Computer Q Initial investment (CF0) $3,000 $3,000 Outcome Annual cash inflows (CF) Pessimistic $ 500 $ 400 Most likely 750 750 Optimistic 1,000 1,200

Required:

Question 1: Determine the range of annual cash inflows for each of the two computers.

Question 2: Construct a table similar to this for the NPVs associated with each outcome for both computers.

Question 3: Find the range of NPVs, and subjectively compare the risks associated with purchasing these computers.

Note: Please explain comprehensively and give step by step solution.