Question: Consider the following two mutually exclusive projects, X and Y, and their cash flows information, Cash Flows Project Year 0 Year 1 Year 2 Year

Consider the following two mutually exclusive projects, X and Y, and their cash flows information,

		Cash Flows
Project	Year 0	Year 1	Year 2	Year 3	Year 4
X	(2,600)	1,000	1,450	600	500
Y	(2,600)	1,100	1,500	500	450

(a) Assume that the discount rate is 13%, calculate the Payback Period , Profitability Index, and Modified IRR (McKinseys approach) for Project Y only.

(b) Given that Project Xs IRR is 16.0%, which project should be chosen according to the IRR method? Precisely explain how you should construct the incremental project and its cash flows numerically. Precisely explain your final selection between these two mutually exclusive projects according to the incremental project (IRR) analysis.

(c) Assume now that the four years of cash flows for Project Y are, -$400, -$500, -$600, and -$800, respectively, while keeping the same initial cash outflow. Calculate the equivalent annual cost (EAC) for Project Y only.

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