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Question 3 YK Ltd is analyzing its capital expenditure proposals for the purchase of equipment...

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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. Project A Project B Project C Initial investment $3,200,000 $1,500,000 $4,000,000 Projected annual operating income Year 1 $250,000 $(100,000) $1,000,000 Year 2 $250,000 $ 400,000 $1,000,000 Year 3 $250,000 $ 300,000 $ (800,000) Year 4 $250,000 $ (900,000) Internal rate of return 12% 17% 5% Estimated useful life 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? (Total: 12 marks)

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