Let us take the case of standard equity returns, which we can understand easily. I am investing Rs. 10000 as a lump sum in a fund. You invest over three years with no reinvestments in between. Like the MIRR calculator, IRR calculators are available online and in tools like Excel.
IRR values and their variations
Assume I get an inflow of Rs. 20000 in the first year. In this case, my IRR will be 100%. However, if I am going to get this inflow in the fourth year, the IRR value will be 25.992%
However, the MIRR in both cases remains at approximately 25%.
Inference
From these calculations, it is clear that IRR works best for investments with a lock-in period with no reinvestments and pay-offs at the end of the investment period. MIRR is a more stable value for predicting investment results for volatile plans with varying reinvestments and cash flows.
MIRR is considered better than IRR as it incorporates more information about cash flows and makes no fixed assumptions. Furthermore, MIRR values remain consistent across a time horizon.
MIRR is most suited for investments requiring variable reinvestments at different times and encountering cash outflows. Moreover, the reinvestment rates are assumed to directly reflect a company’s cost of capital.
So, use the MIRR metric to decide which business idea or investment partnership will yield the best long-term returns.
Open our MIRR calculator in your browser. Enter the cash flows, reinvestment, and financing rates, then click the "Calculate MIRR" button. Repeat the steps for any number of investment plans involving variable reinvestment.
If the computed MIRR from the MIRR calculator is higher than the expected return of the project or investment plan, it is worth continuing the investment. In contrast, one must not take up an investment if the MIRR is lower than the expected cost of capital.
Also, a negative MIRR indicates that the investment will not yield the required cost of capital.
Firstly, note down the positive and negative cash flows separately. Then enter them as comma-separated values in the respective text boxes of the MIRR calculator.
Then, enter your financing rate and reinvestment rate. Both the financing rate and reinvestment rate must not be random and must be derived from the company or investment’s cost of capital. Only then, you can get clear results on the feasibility of reinvestments.
The MIRR calculator gives the right values if entered correctly. Make sure you do the following actions to prevent wrong answers -