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Calculate the equivalent annual cash flow

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1. 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 IRR__

X ($2,700) $1,000 $1,500 $800 $400 16.22%

Y ($3,200) $1,000 $1,600 $1,100 $750 15.51%

(a) Assume that the appropriate discount rate is 14%, calculate the Modified IRR (MIRR; McKinsey's approach) for Project Y only. Explain precisely (and concisely) which project you should recommend according to the MIRR method, given that Modified IRR for Project X is 15.13%.

(b) Explain precisely (and concisely) how you construct the incremental project (between X and Y), and calculate its annual cash flows and IRR (only). Should the incremental project be accepted? Explain precisely (and concisely) your final selection between the two mutually exclusive projects, i.e., X vs Y.

(c) Calculate the Equivalent Annual Cash Flow (i.e., EAC application) for Project Y.

Reference no: EM132683933

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