Cranes Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $10,000,000 for the year. Lyssa Babson, staff analyst at Cranes, is preparing an analysis of the three projects under consideration by Chris Cranes, the company's owner. Requirement 1. Because the company's cash is limited, Cranes thinks the payback method should be used to choose between the capital budgeting projects. a. What are the benefits and limitations of using the payback method to choose between projects? Benefits of the payback method: Data table O A. Indicates whether or not the project will earn the company's minimum required rate of return O B. Utilizes the time value of money and computes each project's unique rate of return O C. Easy to understand and captures uncertainty about expected cash flows in later years of a project D. All of the above I A B D 1 Project A Project B Project C 2 Projected cash outflow equirements 3 Net initial investment $ 5,100,000 $ 5,000,000 $ 6,000,000 4 Projected cash inflows 5 Year 1 6 Year 2 a. $ 2,750,000 $ 3,200,000 $ 3,200,000 2,750,000 1,400,000 3,200,000 2,750,000 1,200,000 250,000 2,750,000 125,000 1. Because the company's cash is limited, Cranes thinks the payback method should be used to choose between the capital budgeting projects. What are the benefits and limitations of using the payback method to choose between projects? b. Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback method, which projects should Cranes choose? 2. Babson thinks that projects should be selected based on their NPVs. Assume all cash flows occur at the end of the year except for initial investment amounts. Calculate the NPV for each project. Ignore income taxes. 3. Which projects, if any, would you recommend funding? Briefly explain why. 7 Year 3 8 Year 4 9 Required rate of return 8% 8% 8%