The Modified Internal Rate of Return (MIRR) is a financial measure that is used to more accurately assess the profitability of an investment compared to the traditional Internal Rate of Return (IRR). This means it anticipates both the cost of the investment and interest gained from cash re-invested in it.
MIRR helps investors assess whether certain investments are worth making, and which would be most profitable. In terms of MIRR, we can say that the value of an investment’s terminal (future) sum adds up to the present values of all its incoming flows compounded at a cost.
Since IRR wrongly assumes that positive flows are reinvested at a uniform rate and negative outflows are financed at a similar rate, this limitation is addressed by MIRR. This method provides a more accurate evaluation of an investment’s profitability especially when comparing mutually exclusive project choices.
Since MIRR signifies which investments have higher returns than others, investors can use it to compare different kinds of investments with different expected outcomes before they make final decisions.
To calculate the MIRR, the formula used is:
\[ \text{MIRR} = \left( \frac{\text{Terminal Value}}{\text{Present Value}} \right)^{\frac{1}{n}} - 1 \]
Where:
Consider an investment with the following cash flows:
Assume a reinvestment rate of 5% (0.05) and a financing rate of 3% (0.03).
Using the formula:
\[ \text{Terminal Value} = 200 \times (1 + 0.05)^2 + 300 \times (1 + 0.05)^1 + 500 \times (1 + 0.05)^0 \]
\[ \text{Terminal Value} = 220.5 + 315 + 500 = 1035.5 \]
\[ \text{Present Value} = -1000 \]
\[ \text{MIRR} = \left( \frac{1035.5}{1000} \right)^{\frac{1}{3}} - 1 \approx 0.0118 \text{ or } 1.18\% \]
Using our MIRR calculator is easy. Just follow the below steps and view the calculated MIRR:
Step 1: Enter your cashflows in the box.
Step 2: Enter your reinvestment rate as a decimal.
Step 3: Add the financing rate.
Step 4: Hit the Calculate MIRR button.
Step 5: View the calculated MIRR.
Enter cash flows as a comma-separated list, e.g., -1000, 200, 300, 500.
The reinvestment rate is the rate at which positive cash flows are assumed to be reinvested.
The financing rate is the rate at which negative cash flows are financed.
Simply enter the cash flows, reinvestment rate, and financing rate, then click the "Calculate MIRR" button.
A higher MIRR indicates a more profitable investment, while a lower MIRR indicates less attractiveness compared to other investment options.