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.
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 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), 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.

Internal Rate of Return  IRR
Internal Rate of Return (IRR) is a metric used in capital budgeting ... 
Pooled Internal Rate Of Return ...
A method of calculating the overall internal rate of return (IRR) ... 
The Net Internal Rate of Return ...
Net internal rate of return (net IRR) is a performance measure ... 
Net Present Value  NPV
Net Present Value (NPV) is the difference between the present ... 
Initial Cash Flow
Initial cash flow is the amount of money paid out or received ... 
Conventional Cash Flow
A series of inward and outward cash flows over time in which ...

Investing
Internal Rate of Return: An Inside Look
Use this method to choose which project or investment is right for you. 
Investing
Return on investment versus internal rate of return
Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI). 
Financial Advisor
Understanding Internal Rate Of Return
Internal rate of return, or IRR, is one of the most popular methods of evaluating potential projects. Learn more about this important metric. 
Investing
Evaluating A Statement Of Cash Flows
The metrics for the Statement of Cash Flows is best viewed over time. 
Investing
Analyze Cash Flow The Easy Way
Find out how to analyze the way a company spends its money to determine whether there will be any money left for investors. 
Small Business
Calculating Net Present Value at Different Points Using Excel
Calculating the net present value (NPV) of your investment projects using Excel. 
Investing
Cash Flow From Investing
Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it. 
Investing
The Essentials Of Corporate Cash Flow
Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.

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 >> 
What's the difference between weighted average cost of capital (WACC) and internal ...
Both weighted average cost of capital (WACC) and internal rate of return (IRR) are great measures for assessing value, but ... Read Answer >> 
How can I calculate the hurdle rate in Excel?
Learn how to evaluate potential investments. Common desktop software provides functions that can help make the decision with ... Read Answer >> 
How much debt is too much when calculating capital budgeting?
Learn how companies determine how much debt is acceptable when funding a new project by using the net present value to estimate ... Read Answer >> 
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 >>