Question

In: Finance

The Short-Line Railroad is considering a $125,000 investment in either of two companies. The cash flows...

The Short-Line Railroad is considering a $125,000 investment in either of two companies. The cash flows are as follows:

Year Electric Co. Water Works
1 $ 90,000 $ 15,000
2 20,000 20,000
3 15,000 90,000
4 – 10 15,000 15,000

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

Electric Co.    Years   
Water Works Years

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

Solutions

Expert Solution

Payback Period for Electric Co.

Year

Cash inflow ($)

Cumulative net Cash flow ($)

0

-1,25,000

-1,25,000

1

90,000

-35,000

2

20,000

-15,000

3

15,000

0

4

15,000

15,000

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 2.00 Years + ($15,000 / $15,000)

= 2.00 Years + 1.00 Year

= 3.00 Years

= 3.0 Years

Payback Period for Water Works

Year

Cash inflow ($)

Cumulative net Cash flow ($)

0

-1,25,000

-1,25,000

1

15,000

-1,10,000

2

20,000

-90,000

3

90,000

0

4

15,000

15,000

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 2.00 Years + ($90,000 / $90,000)

= 2.00 Years + 1.00 Year

= 3.00 Years

= 3.0 Years

DECISION

The Both Investment Projects are acceptable, since it has the same payback period of 3.00 Years.


Related Solutions

The Short-Line Railroad is considering a $180,000 investment in either of two companies. The cash flows...
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.
1. The Short-Line Railroad is considering a $200,000 investment in either of two companies. The cash...
1. The Short-Line Railroad is considering a $200,000 investment in either of two companies. The cash flows are as follows: Year Electric Co. Water Works 1 $ 100,000 $ 50,000 2 50,000 50,000 3 50,000 100,000 4 – 10 25,000 25,000 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?    Electric Co. Water Works 2. Aerospace Dynamics will invest $198,000 in...
Mountain Brook Company is considering two investment opportunities whose cash flows are provided below: Year Investment...
Mountain Brook Company is considering two investment opportunities whose cash flows are provided below: Year Investment A Investment B 0 $ (15,000)         $ (9,000)         1 5,000         5,000         2 5,000         4,000         3 5,000         3,000         4 4,000         1,000             The company's hurdle rate is 12%. What is the present value index of Investment A? (Do not round your PV factors and intermediate calculations.) Multiple Choice 1.01 1.00 0.97 None of these answers...
An Australian company is considering a three month short-term investment of 10,000AUD in either Australia or...
An Australian company is considering a three month short-term investment of 10,000AUD in either Australia or Switzerland. The following information is available Initial spot exchange rate (AUD/CHF)                      1.0775-1.0825             Australian three month LIBOR rate (deposit – loan) 4.75-5.25% p.a.             Swiss three month LIBOR rate (deposit – loan)        2.25-2.75% p.a.             Australian lending/borrowing spread                          +1.5%p.a.             Swiss lending/borrowing spread                                 +0.5%p.a. If the ending spot exchange rate (AUD/CHF) is expected to be 1.0875-1.0925, which financing option should be taken....
An Australian company is considering a three month short-term investment of 10,000AUD in either Australia or...
An Australian company is considering a three month short-term investment of 10,000AUD in either Australia or Switzerland. The following information is available Initial spot exchange rate (AUD/CHF) 1.0775-1.0825 Australian three month LIBOR rate (deposit – loan) 4.75-5.25% p.a. Swiss three month LIBOR rate (deposit – loan) 2.25-2.75% p.a. Australian lending/borrowing spread +1.5%p.a. Swiss lending/borrowing spread +0.5%p.a. Required: (a) If the ending spot exchange rate (AUD/CHF) is expected to be 1.0875-1.0925, which financing option should be taken. (b) If the ending...
The cash flows of a firm next year will be either $250 or $1,750 in two...
The cash flows of a firm next year will be either $250 or $1,750 in two equally probable scenarios. The firm dissolves at the end of the year and discount rates are zero. The firm has debt with face value $500 and maturity one year (no coupon). 1. What is the value of the firm? What is the value for shareholders? What is the value of bondholders? 2.. Suppose that the firm decides to invest in a safer asset that...
Managers of the New Hope and Ivyland Short Line Railroad conducted and experiment in which they...
Managers of the New Hope and Ivyland Short Line Railroad conducted and experiment in which they reduced fares by about 28% for approximately a year to estimate the price elasticity of demand. This large fare reduction resulted in essentially no change in the railroad’s revenues. Take a face value, what seemed to be the price elasticity of demand?
An investment that Kevin is considering offers the following cash flows. Year 1 Initial investment of...
An investment that Kevin is considering offers the following cash flows. Year 1 Initial investment of $10,000 Year 2 Inflow of $2,000 Year 3 Inflow of $1,500 Year 4 Additional investment of $5,000 Year 5 Inflow of $1,200 Year 6 Inflow of $2,200 Year 7 Inflow of 1,500 Year 8 Inflow of $1,000 Year 9 Inflow of $1,200 Year 10 Sale proceeds of $17,000 5. What is the internal rate of return (IRR) that this investment offers if all cash...
Capital Budgeting Question: You are considering two mutually exclusive projects for potential investment. The cash flows...
Capital Budgeting Question: You are considering two mutually exclusive projects for potential investment. The cash flows for the two projects are given. For both projects, the required rate of return is 12%. Year Project A Project B 0 ($40,000) ($40,000) 1 $14,400 $0 2 $14,400 $0 3 $14,400 $0 4 $14,400 $70,000 Find the following: 1. The Net Present Value (NPV) . 2. The Internal Rate of Return (IRR) . 3. Use Excel to draw a graph of the NPV...
Question 4. GHI is considering two investment proposals. Estimated cash flows are below. Each will require...
Question 4. GHI is considering two investment proposals. Estimated cash flows are below. Each will require an initial cash outlay, followed by several years of positive cash flows. Each project will terminate and all assets will be liquidated in year 6. GHI’s WACC is 9%. Year Project 1 Project 2 Initial outlay $1,000,000 $500,000 1 $160,000 $120,000 2 $200,000 $120,000 3 $300,000 $120,000 4 $400,000 $120,000 5 $350,000 $120,000 6 included salvage $300,000 $150,000 Calculate NPV, IRR, MIRR, PI, and...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT