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 twoyear 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.

Net Present Value  NPV
The difference between the present value of cash inflows and ... 
Cost Of Capital
The required return necessary to make a capital budgeting project, ... 
Pooled Internal Rate Of Return ...
A method of calculating the overall internal rate of return (IRR) ... 
Discounted Cash Flow  DCF
A valuation method used to estimate the attractiveness of an ... 
Cash Flow
1. A revenue or expense stream that changes a cash account over ... 
Capital Budgeting
The process in which a business determines whether projects such ...

What's the difference between net present value and internal rate of return? How ...
Both of these measurements are primarily used in capital budgeting, the process by which companies determine whether a new ... Read Full Answer >> 
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 >>

Bonds & Fixed Income
Investors Need A Good WACC
Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality. 
Fundamental Analysis
Taking Stock Of Discounted Cash Flow
Learn how and why investors are using cash flowbased analysis to make judgments about company performance. 
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. 
Fundamental Analysis
What is a Null Hypothesis?
In statistics, a null hypothesis is assumed true until proven otherwise. 
Fundamental Analysis
Understanding the Capital Adequacy Ratio
The capital adequacy ratio (CAR) is an international standard that measures a bank’s risk of insolvency from excessive losses. Currently, the minimum acceptable ratio is 8%. Maintaining an acceptable ... 
Investing
Additional PaidIn Capital
Additional paidin 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 ... 
Fundamental Analysis
Capital Budgeting
Capital budgeting is a planning process used by companies to evaluate which large projects to invest in, and how to finance them. It is sometimes called “investment appraisal.” 
Economics
How A Limited Government Affects A Country's Finances
Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result? 
Investing
Return On Capital Employed  ROCE
Return on Capital Employed (ROCE) is a financial ratio that measures company's ability to earn a return on all of the capital it employs. 
Investing
Capital Structure
Capital structure is the combination of the debt and equity a company uses to finance its longterm operations and growth.