The short-line railroad is considering a $100,000 investment in either of two companies. the cash flows are as follows: year electric co. water works 1 $ 70,000 $ 15,000 2 15,000 15,000 3 15,000 70,000 4 – 10 10,000 10,000 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

a. 3 years and 3 years

b. either company can be selected

Explanation:

a. In the payback, we analyze how many years the invested amount is recovered. The computation is shown below:

= Initial investment ÷ Net cash flow

For Electric Co.

In year 0 = $100,000

In year 1 = $70,000

In year 2 = $15,000

In year 3 = $15,000

In year 4 to 10 = $10,000

If we sum the first 3 year cash inflows than it would be $100,000 which is equal to the initial investment

So, the payback period equal to

= $100,000 ÷ $100,000 = 3 years

In 3 years, the invested amount is recovered.

For Water Works

In year 0 = $100,000

In year 1 = $15,000

In year 2 = $15,000

In year 3 = $70,000

In year 4 to 10 = $10,000

If we sum the first 3 year cash inflows than it would be $100,000 which is equal to the initial investment

So, the payback period equal to

= $100,000 ÷ $100,000 = 3 years

In 3 years, the invested amount is recovered.

b. Since both the companies has same payback period so either company can be selected

commercial banking

provide online payment services

provide online banking

asset management firms

invest in people's funds in securities

accept tax return refunds

a

explanation:

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