Referring back to problem 4, if the inflow in the fifth year for investment X were $20,000,000 instead of $20,000, would your answer change under the payback Solution: The $20,000,000 inflow would still leave the pay back period for Investment X at 4 years. It would remain inferior to Investment Y under the pay back method 12-6 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 70,000 $l5,000 2 15,000 70.000 4-10 10.000 10.000 Using the payback method, what will the decision be? Explain why the answer in part a can be mislead ing Solution: Short-Line railroad a Payback for Electric Co Payback for Water Works $100,000-$70,0001 $100000-$150001 30,000-15,0002 years 85000-15,0002 years 15000-15.0003 years 70,000-70,0003 years Payback(Electric Co. )=3 years Payback(Water Works)=3 years S-427 Copyright o 2005 by The McGraw-Hill Companies, IncCopyright © 2005 by The McGraw-Hill Companies, Inc. S-427 12-5. Referring back to problem 4, if the inflow in the fifth year for investment X were $20,000,000 instead of $20,000, would your answer change under the payback method? Solution: The $20,000,000 inflow would still leave the payback period for Investment X at 4 years. It would remain inferior to Investment Y under the payback method. 12-6. 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. Solution: Short-Line Railroad a. Payback for Electric Co. Payback for Water Works $100,000 – $70,000 1 year $100,000 – $15,000 1 year 30,000 – 15,000 2 years 85,000 – 15,000 2 years 15,000 – 15,000 3 years 70,000 – 70,000 3 years Payback (Electric Co.) = 3 years Payback (Water Works) = 3 years