The head of the consulting division of a major firm has proposed investing $300,000 in personal computers for the staff. The useful life of the computers is five years. Computers qualify for Class 10, 30 percent declining balance. There is no terminal salvage value. Labour savings of $125,000 per year (in Year-0 dollars) are expected from the purchase. The income tax rate is 45 percent, the after-tax required rate of return is 20 percent, which includes a 4 percent element attributable to inflation. 

1. Compute the net present value of the computers. Use the nominal required rate of return and adjust the cash flows for inflation. (For example, Year-1 cash flow = 1.04 Year-zero cash flow.) 

2. Compute the net present value of the computers using the nominal required rate of return without adjusting the cash flows for inflation. 

3. Compare your answers in requirements 1 and 2. Which is correct? Would using the incorrect analysis generally lead to overinvestment or underinvestment? Explain.