Modified Internal Rate of Return (MIRR)
A modified IRR that uses explicit finance and reinvestment rates rather than the IRR's implicit assumption that intermediate cash flows are reinvested at the IRR itself. Computes the future value of positive cash flows at the reinvestment rate, the present value of negative cash flows at the finance rate, then solves for the rate that links them over n years.
When to use: Use when you want a more realistic rate-of-return measure than IRR — especially for high-IRR projects where the IRR's reinvestment assumption is implausible. Also use when cash flows change sign multiple times and IRR returns multiple or ambiguous answers.
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
MIRR of 15.77% — lower than the 21.86% IRR because we replaced the unrealistic reinvest-at-21.86% assumption with a realistic 8% reinvestment rate. MIRR is the more honest figure.
Frequently Asked Questions
Because IRR assumes intermediate positive cash flows are reinvested at the IRR itself (often unrealistically high), whereas MIRR uses an explicit, lower reinvestment rate. MIRR strips out the optimistic compounding assumption baked into IRR.
Finance rate = your cost of capital (rate at which you fund negative cash flows). Reinvestment rate = the rate at which you can realistically deploy intermediate positive cash flows — often the cost of capital, or sometimes a money-market rate if cash sits idle.
Rarely, but yes — if your reinvestment rate is higher than the IRR (which would imply an unusually attractive secondary investment opportunity). For typical projects, MIRR ≤ IRR.