Modified Internal Rate Of Return - MIRR

While the internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR, the modified IRR assumes that positive cash flows are reinvested at the firm's cost of capital, and the initial outlays are financed at the firm's financing cost. Therefore, MIRR more accurately reflects the cost and profitability of a project.

The formula for MIRR is:

For example, say a two-year project with an initial outlay of $195 and a cost of capital of 12%, will return $121 in the first year and $131 in the second year. To find the IRR of the project so that the net present value (NPV) = 0:

NPV = 0 = -195 + 121/(1+ IRR) + 131/(1 + IRR)2 NPV = 0 when IRR = 18.66%

To calculate the MIRR of the project, we have to assume that the positive cash flows will be reinvested at the 12% cost of capital. So the future value of the positive cash flows is computed as:

$121(1.12) + $131 = $266.52 = Future Value of positive cash flows at t = 2

Now you divide the future value of the cash flows by the present value of the initial outlay, which was $195, and find the geometric return for 2 periods.

=sqrt($266.52/195) -1 = 16.91% MIRR

You can see here that the 16.91% MIRR is materially lower than the IRR of 18.66%. In this case, the IRR gives a too optimistic picture of the potential of the project, while the MIRR gives a more realistic evaluation of the project.


Investment dictionary. . 2012.

Look at other dictionaries:

  • The Net Internal Rate Of Return - Net IRR — A measure of a portfolio or fund s performance that is equal to the internal rate of return (IRR) after management fees and carried interest have been accounted for. It is a capital budgeting and portfolio management term. The IRR is a discount… …   Investment dictionary

  • Rate of return — In finance, rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested.… …   Wikipedia

  • Modified Dietz Method — The Modified Dietz Method is a calculation used to determine an approximation of the performance of an investment portfolio based on money weighted cash flow.[1] A more precise way of calculating performance in the presence of external cash flows …   Wikipedia

  • Royalty rate assessment — is a practical tool to gauge the impact of a royalty commitment in a technology contract to the business interests of the contracting parties. In this coverage, the terms royalty , royalty rate and royalties are used interchangeably.A firm with… …   Wikipedia

  • Basic rate interface — (BRI, 2B+D, 2B1D) is an Integrated Services Digital Network (ISDN) configuration defined in the physical layer standard I.430 produced by the ITU. This configuration consists of two 64 kbit/s bearer channels (B channels) and one 16 kbit/s data… …   Wikipedia

  • List of finance topics — Topics in finance include:Fundamental financial concepts* Finance an overview ** Arbitrage ** Capital (economics) ** Capital asset pricing model ** Cash flow ** Cash flow matching ** Debt *** Default *** Consumer debt *** Debt consolidation ***… …   Wikipedia

  • Outline of finance — The following outline is provided as an overview of and topical guide to finance: Finance – addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks… …   Wikipedia

  • Financial ratio — Corporate finance …   Wikipedia

  • Social Security (United States) — This article is about the retirement/disability program. For the general concept of providing welfare, see Social security. For other uses, see Social Security (disambiguation) …   Wikipedia

  • Life insurance — The foundation of life insurance is the recognition of the value of a human life and the possibility of indemnification for the loss of that value. F. C. Oviatt, Economic place of insurance and its relation to society[1] Life insurance is a… …   Wikipedia

  • Variable universal life insurance — (often shortened to VUL) is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.