## What is 'Modified Internal Rate Of Return - MIRR'

Modified internal rate of return (MIRR) 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. By contrast, the traditional internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR. The MIRR more accurately reflects the cost and profitability of a project.

Next Up

## BREAKING DOWN 'Modified Internal Rate Of Return - MIRR'

The MIRR is used to rank investments or projects of unequal size. The calculation is a solution to two major problems that exist with the popular IRR calculation. The first main problem with IRR is that multiple solutions can be found for the same project. The second problem is that the assumption that positive cash flows are reinvested at the IRR is considered impractical in practice. With the MIRR, only a single solution exists for a given project, and reinvestment rate of positive cash flows is much more valid in practice.

## Calculating the Modified Internal Rate of Return and Example

The formula for the MIRR takes into account three variables. They are:

FVCF(c) = the future value of positive cash flows at the cost of capital for the company

PVCF(fc) = the present value of negative cash flows at the financing cost of the company

n = number of periods

Given the variables, the formula for MIRR is:

MIRR = ( FVCF(c) / PVCF(fc) ) ^ ( 1 / n ) -1

A basic IRR calculation is as follows. Assume that 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), when IRR = 18.66%.

To calculate the MIRR of the project, assume that the positive cash flows will be reinvested at the 12% cost of capital. Therefore, 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

Next, 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.

Finally, adjust this ratio for the time period using the formula for MIRR given:

MIRR = (\$266.52 / \$195) ^ (1 / 2) - 1 = 1.1691 - 1 = 16.91%

In this particular example, the IRR gives an overly optimistic picture of the potential of the project, while the MIRR gives a more realistic evaluation of the project.

RELATED TERMS
1. ### Internal Rate of Return - IRR

Internal Rate of Return (IRR) is a metric used in capital budgeting ...
2. ### IRR Rule

The internal rate of return (IRR) rule is a guideline for evaluating ...
3. ### The Net Internal Rate of Return ...

Net internal rate of return (net IRR) is a performance measure ...
4. ### Pooled Internal Rate Of Return ...

Pooled internal rate of return is a method of calculating overall ...
5. ### Unconventional Cash Flow

An unconventional cash flow is a series of inward and outward ...
6. ### Initial Cash Flow

Initial cash flow is the amount of money paid out or received ...
Related Articles

### Capital Budgeting: Which is Better, IRR or NPV?

Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense.

3. Investing

### Evaluating A Statement Of Cash Flows

The metrics for the Statement of Cash Flows is best viewed over time.
4. Investing

### Fundamental Case Study: Is Amazon's Cash Flow Actually Solid? (AMZN)

Review Amazon's cash flow situation, including its free cash flow yield, operating cash flow from organic growth and cash flow from debt financing.
5. Tech

### Cash Flow Is King: How to Keep it Running

Why is cash flow so important, and what steps can a business take to improve it?
6. Investing

### Corporate cash flow: Understanding the essentials

Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
7. Personal Finance

### 10 Ways to Improve Cash Flow in Construction

Improving cash flow in construction requires some sector-specific strategies.

### Understanding Cash Flow

Learn about the different types of cash flows and the importance for businesses to properly manage their cash flows.
RELATED FAQS
1. ### How do you calculate IRR in Excel?

Understand how to calculate the internal rate of return (IRR) in Excel and how it's used to determine anticipated yield per ... Read Answer >>
2. ### What is the formula for calculating the internal rate of return (IRR)?

Learn about the internal rate of return, an important concept in determining the relative attractiveness of different investments. Read Answer >>
3. ### How do you use discounted cash flow to calculate a capital budget?

Learn how discounted cash flows are used in creating capital budgets as a part of the net present value and internal rate ... Read Answer >>
4. ### Free & operating cash flows: What's the Difference?

Learn the difference between free cash flow and operating cash flow. Explore how analysts use earnings and cash flow to evaluate ... Read Answer >>
Hot Definitions
1. ### Gross Margin

A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
2. ### Inflation

Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
3. ### Discount Rate

Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
4. ### Economies of Scale

Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
5. ### Quick Ratio

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
6. ### Leverage

Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...