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The IRR evaluation method assumes that cash flows from the project are reinvested at a rate equal to the project’s IRR. However, in reality, the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, using the modified IRR approach, you can make a more reasonable estimate of a project’s rate of return than the project’s IRR can. Consider the following situation: Grey Fox Aviation Company is analyzing a project that requires an initial investment of $450,000. The project’s expected cash flows are: Year Cash Flow Year 1 $275,000 Year 2 –125,000 Year 3 475,000 Year 4 400,000 Grey Fox Aviation Company’s WACC is 10%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR). 21.18% 23.53% 25.88% 24.71%
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