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 necessanly generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR.

Consider the following situation:

Fuzzy Button Clothing Company is analyzing a project that requires an initial investment of $$450,000.$ The project's expected cash flows are:

$\backslash$table$[[$Year$,$Cash Flow$],[$Year $1,$$$350,000$