The ShortLine Railroad is considering a 185000 investment in

The Short-Line Railroad is considering a $185,000 investment in either of two companies. The cash flows are as follows:

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

Solution

In the above formula,
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

Electric co.

We get 185000 in 3 years in this case. (45000+45000+95000)

Hence payback period will be 3 years.

Water Works.

In this case also we get 185000 in 3 years (45000+45000+95000)

Hence, payback period will be 3 years.

b. Both investments are same due to same payback period of 3 years.