Answer:
a. 3 years and 3 years
b. either company can be selected
Explanation:
a. In the payback, we analyze how many years the invested amount is recovered. The computation is shown below:
= Initial investment ÷ Net cash flow
For Electric Co.
In year 0 = $100,000
In year 1 = $70,000
In year 2 = $15,000
In year 3 = $15,000
In year 4 to 10 = $10,000
If we sum the first 3 year cash inflows than it would be $100,000 which is equal to the initial investment
So, the payback period equal to
= $100,000 ÷ $100,000 = 3 years
In 3 years, the invested amount is recovered.
For Water Works
In year 0 = $100,000
In year 1 = $15,000
In year 2 = $15,000
In year 3 = $70,000
In year 4 to 10 = $10,000
If we sum the first 3 year cash inflows than it would be $100,000 which is equal to the initial investment
So, the payback period equal to
= $100,000 ÷ $100,000 = 3 years
In 3 years, the invested amount is recovered.
b. Since both the companies has same payback period so either company can be selected
