Solved: Payback method-short-line railroad, Finance Basics

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Payback method-short-line railroad

Problem: 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. Using the payback method, what will the decision be?

b. Explain why the answer in part a can be misleading.

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Finance Basics: Payback method-short-line railroad

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