Homework SourseThe ShortLine Railroad is considering a 150000 investment in
The Short-Line Railroad is considering a $150,000 investment in either of two companies. The cash flows are as follows:
Year Electric Co. Water Works
1 $ 75,000 $ 30,000
2 30,000 45,000
3 45,000 75,000
4 – 10 15,000 15,000
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.
Solution
the following is the calcultion of payback period:
investment @ $150,000 is to be recovered.
since both companies recover the initial investment of 150,000 in 3 years, the payback period for both the companies is 3 years.
b.Electric co.
Though both companies have the same payback period, the electric co recovers greater amounts than water works in initial years, so Electric co is superior from the information provided.
| Electric co | Water works | |||
| year | cash flow | cumulative cash flow | cash flow | cumulative cashflow |
| 1 | 75,000 | 75,000 | 30,0000 | 30,000 |
| 2 | 30,000 | 105,000 | 45,000 | 75,000 |
| 3 | 45,000 | 150,000 | 75,000 | 150,000 |
