Final answer:
The Modified Internal Rate of Return (MIRR) is a capital budgeting method that uses a consistent reinvestment rate for cash flows before applying the IRR decision rule, incorporating the firm's cost of capital to provide a more accurate measure of a project's profitability.
Step-by-step explanation:
A capital budgeting method that uses a consistent reinvestment rate for a project's cash flows before applying the Internal Rate of Return (IRR) decision rule is known as the Modified Internal Rate of Return (MIRR). This method addresses some of the limitations of the traditional IRR, specifically around the unrealistic assumption that cash flows are reinvested at the IRR itself. The MIRR instead assumes that positive cash flows are reinvested at the firm's cost of capital, or some other appropriate rate, and provides a more accurate reflection of the project's profitability and actual rate of return. In doing so, it aligns investment decisions more closely with the management's reinvestment strategy and the company's long-term growth objectives.