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

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Finance

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

YearElectric Co.Water Works
1$80,000$30,000
250,00070,000
350,00080,000
4 – 1020,00020,000


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



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

Water Works
Electric Co.

Answer & Explanation Solved by verified expert
4.4 Ratings (806 Votes)

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.

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Transcribed Image Text

The Short-Line Railroad is considering a $180,000 investment ineither of two companies. The cash flows are as follows:YearElectric Co.Water Works1$80,000$30,000250,00070,000350,00080,0004 – 1020,00020,000a. Compute the payback period for both companies.(Round your answers to 1 decimal place.)  b. Which of the investments is superior from theinformation provided?  Water WorksElectric Co.

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