Question

The Short-Line Railroad is considering a $180,000 investment in either of two companies. The cash flows are as follows:

Year	Electric Co.			Water Works
1	$	80,000		$	30,000
2		50,000			70,000
3		50,000			80,000
4 – 10		20,000			20,000

a. Compute the payback period for both companies. (Round your answers to 1 decimal place.)
  

b. Which of the investments is superior from the information provided?
  

	Water Works
	Electric Co.

Answer 1

	Short-Line Railroad
	Electrice Co.
1)	Year	Cash Inflow	Cumulative Cash Inflow
	0	$            (1,80,000.00)	$                         (1,80,000.00)
a)	1	$                  80,000.00	$                         (1,00,000.00)
	2	$                  50,000.00	$                            (50,000.00)
	3	$                  50,000.00	$                                              -
	4	$                  20,000.00	$                               20,000.00
	5	$                  20,000.00
	6	$                  20,000.00
	7	$                  20,000.00
	8	$                  20,000.00
	9	$                  20,000.00
	10	$                  20,000.00	$                               40,000.00
	Payback Period=2+(50000/50000)	3.00	Years
	Water Works
	Year	Cash Inflow	Cumulative Cash Inflow
	0	$            (1,80,000.00)	$                         (1,80,000.00)
	1	$                  30,000.00	$                         (1,50,000.00)
	2	$                  70,000.00	$                            (80,000.00)
	3	$                  80,000.00	$                                              -
	4	$                  20,000.00	$                               20,000.00
	5	$                  20,000.00	$                               40,000.00
	6	$                  20,000.00	$                               60,000.00
	7	$                  20,000.00	$                               80,000.00
	8	$                  20,000.00	$                           1,00,000.00
	9	$                  20,000.00	$                           1,20,000.00
	10	$                  20,000.00	$                           1,40,000.00
	Payback Period=2+(80000/80000)	3.00	Years
b)	On the basis of Payback period it is not possible to take the decision because both Companies have same Payback period.On the otherwise Electric Company is superior because larger cash flow in ealier year.