The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the projects IRR. Consider the following situation: Grey Fox Aviation Company is analyzing a project that requires an initial investment of $2,225,000. The projects expected cash flows are: Year Cash Flow Year 1 $350,000 Year 2 150,000 Year 3 400,000 Year 4 400,000 Grey Fox Aviation Companys WACC is 9%, and the project has the same risk as the firms average project. Calculate this projects modified internal rate of return (MIRR): 22.60% 23.85% 21.34% -13.95%

If Grey Fox Aviation Companys managers select projects based on the MIRR criterion, they should this independent project.