Heart Construction is analyzing its capital expenditure proposals for equipment in the coming year. The capital budget is limited to $15,000,000 for the year. Laura, staff analyst at Heart Construction, is preparing an analysis of the three projects under consideration by Mr. Heart, the companys owner.

	Project A	Project B	Project C
Net initial investment	$6,600,000	$8,500,000	$9,000,000
Year 1 cash inflows	3,600,000	5,500,000	4,900,000
Year 2 cash inflows	3,600,000	2,000,000	4,900,000
Year 3 cash inflows	3,600,000	1,100,000	200,000
Year 4 cash inflows	3,600,000	0	100,000
Required rate of return	6%	6%	6%

Because the companys cash is limited, Mr. Heart thinks the payback method should be used to choose between the capital budgeting projects.

Requirement

1. What are the benefits of the payback methods?
2. What are the limitations of the payback methods?
3. Calculate the payback period for each of the three projects. Ignore income taxes. Round your answer to 2 decimal places.
4. Based on the payback period, which project should Mr. Heart choose?
5. Calculate the simple rate of return for each project. Ignore income taxes.
6. Based on the simple rate of return, which project should Mr. Heart choose?