Question $3$

YK Ltd is analyzing its capital expenditure proposals for the purchase of equipment in the coming

year. The capital budget is limited to $$5,000,000$ for the year. Mr Lam, the chief accountant of YK

Ltd$,$ is preparing an analysis of the three projects for the senior management. The straight$-$line

method of depreciation is adopted for each project. The residual value of project A is $$200,000,$

whereas the residual value for project $B$ and $C$ is zero. The company expects no liquidity problem

in coming years. All revenue and expenses are in cash.

YK Ltd require a minimum return on investment of $10\%.$

The initial cost of investment and the projected annual operating income are shown below.

Initial investment

Projected annual operating income

Year $1$

Year $2$

Year $3$

Year $4$

Internal rate of return

Estimated useful life

Project A Project $B$ Project $C$

$$3,200,000,$$$1,500,000,$$$4,000,000$

$$250,000,$$$(100,000),$$$1,000,000$

$$250,000,$$$400,000,$$$1,000,000$

$$250,000,$$$300,000,$$$(800,000)$

$$250,000,$$$(900,000)$

$12\%$

$17\%$

$5\%$

$4$ years

$3$ years

$4$ years

Required:

Evaluate the feasibility of each project by using the Net Present Value, payback period and internal

rate of return method. Which project $($s$)$ will you select?