Question

The Short-Line Railroad is considering a $170,000 investment in either of two companies.

The cash flows are as follows:

Year      Electric Co.     Water Works

1           $ 90,000            $ 40,000

2           40,000               40,000

3            40,000              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 Words ____________years

Answer 1

Electric Co:

Year	Cash flows	Cumulative Cash flows
0	(170,000)	(170,000)
1	90000	(80000)
2	40000	(40000)
3	40000	0

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3 years.

Water Works:

Year	Cash flows	Cumulative cash flows
0	(170000)	(170000)
1	40000	(130,000)
2	40000	(90000)
3	90000	0

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

[These tables would go on upto year 10]

=3 years