1. 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.

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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