Modified Internal Rate Of Return - MIRR


DEFINITION of '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:


INVESTOPEDIA EXPLAINS 'Modified Internal Rate Of Return - MIRR'

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.

  1. Net Present Value - NPV

  2. Cost Of Capital

  3. Pooled Internal Rate Of Return ...

    A method of calculating the overall internal rate of return (IRR) ...
  4. Discounted Cash Flow - DCF

    A valuation method used to estimate the attractiveness of an ...
  5. Cash Flow

    1. A revenue or expense stream that changes a cash account over ...
  6. Capital Budgeting


    Both of these measurements are primarily used in capital budgeting, the process by which companies determine whether a new ... Read Full Answer >>
  2. Which is a better measure for capital budgeting, IRR or NPV?

    In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Investors Need A Good WACC

  2. Fundamental Analysis

    Taking Stock Of Discounted Cash Flow

  3. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  4. Fundamental Analysis

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  5. Fundamental Analysis

    Understanding the Capital Adequacy Ratio

  6. Investing

    Additional Paid-In Capital

    Additional paid-in capital is an account in the equity section of a balance sheet. It represents the additional amount paid for the company’s shares over the par value of the shares. Additional ...
  7. Fundamental Analysis

    Capital Budgeting

  8. Economics

    How A Limited Government Affects A Country's Finances

  9. Investing

    Return On Capital Employed - ROCE

  10. Investing

    Capital Structure

    Capital structure is the combination of the debt and equity a company uses to finance its long-term operations and growth.

You May Also Like

Hot Definitions
  1. DuPont Analysis

  2. Asset Class

  3. Fiat Money

  4. Interest Rate Risk

  5. Income Effect

  6. Price-To-Sales Ratio - PSR

Trading Center