au ama 41 of 43 Part 4 The Capital Budgeting Process 9. The Short-Line Railroad is considering a $100,000 investment in either of two companies. The cash flows are as follows: Year 1 2 ................ 3 4-10 Electric Co. $70,000 15,000 15,000 10,000 Water Works $15.000 15.000 70.000 10,000 a. Using the payback method, what will the decision be? b. Explain why the answer in part a can be misleading, 10. Diaz Camera Company is considering two investments, both of which cost $10,000. The cash flows are as follows: Year 1 2 3 Project A $6,000 4.000 3,000 Project B $5,000 3.000 8,000 Which of the two projects should be chosen based on the payback method? b. Which of the two projects should be chosen based on the net present value method? Assume a cost of capital of 10 percent. Should a firm normally have more confidence in answer a or answer b