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:

Fuzzy Button Clothing Company is analyzing a project that requires an initial investment of $3,225,000. The projects expected cash flows are:

Year	Cash Flow
Year 1	$275,000
Year 2	100,000
Year 3	500,000
Year 4	500,000

Fuzzy Button Clothing Companys WACC is 7%, and the project has the same risk as the firms average project. Calculate this projects modified internal rate of return (MIRR):

21.69%

15.09%

-19.78%

17.92%