Modified Internal Rate of Return (MIRR)
Modified Internal Rate of Return (MIRR)
Annualized rate linking the present value of negative cash flows discounted at a finance rate to the terminal value of positive cash flows accumulated at a reinvestment rate.
When to use: Use to state financing and reinvestment assumptions explicitly when comparing terminal wealth. Use NPV to assess value at the relevant opportunity cost.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| MIRR | Modified Internal Rate of Return | IRR with explicit reinvestment and finance rates | % |
| CashFlows | Cash Flows | Sequence of cash flows starting at period 0 (negative for outflows, positive for inflows) | $ |
| FinanceRate | Finance Rate | Rate at which negative cash flows are financed (cost of capital) | % |
| ReinvestRate | Reinvestment Rate | Rate at which positive cash flows are reinvested | % |
Real-Life Examples
Example 1: 4-Year Project
Same project as the IRR example: -$1,000 today, $400/year for 4 years. Finance rate 10%, reinvestment rate 8%.
Given
Step-by-Step
For these inputs, Modified Internal Rate of Return is 15.868529% under the stated payment, compounding and accounting assumptions.
Frequently Asked Questions
No. Its relation to an IRR depends on cash-flow timing and both assumed rates. Neither metric is automatically more accurate for every decision.
Use a financing rate appropriate to funding outflows and a reinvestment rate appropriate to deploying interim inflows. State both assumptions and use the same period as the cash-flow series.