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

(16%) information,

Cash Flows

Project t = 0 Year 1 Year 2 Year 3 Year 4

X ($1,400) $600 $550 $550 $600

Y ($1,000) $300 $400 $500 $600

Assume that the discount rate is 12%, compute the payback period and the Modified IRR (McKinseys approach) of Project X only.

Given that Project Y has an IRR of 24.89%, construct the incremental project between X and Y, and compute the IRR of the incremental project. Explain precisely your final project selection between X and Y according to the incremental project analysis that supplements your initial IRR analysis.

(Hint: You need to compute Project Xs IRR for constructing the incremental project!)

Now, assume that while Project Xs initial cash outlay remains the same, its four years cash flows are, respectively, -$600, -$550, -$550, and -$600. Compute the Equivalent Annual Cost (EAC) for Project X.