Modified internal rate of return (MIRR)

Definition

Modified Internal Rate of Return (MIRR) is a financial metric used to evaluate the attractiveness of an investment, addressing some limitations of the traditional Internal Rate of Return (IRR). It considers both the cost of investment and the interest earned on reinvestment of cash flows.

5 Must Know Facts For Your Next Test

1. MIRR assumes reinvestment at the project's cost of capital, unlike IRR which assumes reinvestment at the IRR itself.
2. It provides a more accurate reflection of an investment's profitability when compared to IRR.
3. MIRR helps in resolving multiple IRRs issue that can occur with non-conventional cash flows.
4. The formula for MIRR includes discounting negative cash flows at the finance rate and compounding positive cash flows at the reinvestment rate.
5. MIRR can be calculated using financial calculators or spreadsheet software like Excel.

Review Questions

• How does MIRR address the limitations of traditional IRR?
• What does MIRR assume about the reinvestment rate for project cash flows?
• Why might MIRR provide a more reliable measure than IRR for projects with non-conventional cash flows?

Related terms

Internal Rate of Return (IRR): A metric used to estimate the profitability of potential investments, where net present value (NPV) equals zero.

Net Present Value (NPV): The difference between the present value of cash inflows and outflows over a period.

Payback Period: The time it takes for an investment to generate enough cash flow to recover its initial cost.