Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation. Like the regular version of IRR, MIRR is used to gauge the strength of a potential capital project and rank it against similar capital projects.A weakness of the traditional IRR calculation is that it assumes positive cash flows from the project are reinvested at the return rate of the project. A better assumption is that positive cash flows from a project will be reinvested at the company’s cost of capital and the initial funding, and any negative cash flow is financed at the company’s cost. Modifying IRR this way gives a more accurate picture of a project’s profitability. The MIRR formula is: Assume ABC Corp is thinking about a project. ABC’s cost of capital reinvestment rate is 5% and its financial rate is 6%. ABC expects the initial outlay for the project and the cash flows for the next three years to be as follows: Time Period Cash Initial Outlay -2000 Year 1 -6000 Year 2 6000 Year 3 5000 The traditional formula renders an IRR of 20.61%, which could mean this project is attractive. But given ABC’s low financing and capital cost rates, the MIRR is a much lower 13.84%. By using its own capital cost and financing rates in an MIRR calculation, ABC is better able to evaluate the viability of the project and avoid investing in a project based on an incorrect and overly optimistic analysis.