Question

The Short-Line Railroad is considering a $190,000 investment in either of two companies. The cash flows are as follows:

Year	Electric Co.			Water Works
1	$	85,000		$	40,000
2		55,000			65,000
3		50,000			85,000
4 – 10		10,000			10,000

a. Compute the payback period for both companies.

Electric Co.		years
Water Works		years

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

Answer 1

a)
Payback period
Elecrtric co
1	85,000
2	55,000
3	50,000
	1,90,000
Hence, payback period = 3 years
Payback period of Water works
1	40,000
2	65,000
3	85,000
	1,90,000
Hence, payback period = 3 years
b)
Even though the payback period of both companies is 3 years, still Electric co is superior because its initial cash inflow is higher than Water works payback period.

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