Modified Internal Rate of Return

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Modified Internal Rate of Return

A form of the internal rate of return that assumes all returns are reinvested at a company's cost of capital. As such, it measures the profitability, as opposed to the raw cash flow, of an investment or project. It is considered a more accurate way of measuring the net present value of future cash flows.
References in periodicals archive ?
a) Calculate MIRR figures for the open-cast and deep-mine methods.
b) Discuss the use of MIRR to evaluate the two options available to CAMC.
The mathematical relationship between the MIRR as arrived at in my article (there are other variations to its calculation) and the MGR is (1 +MIRR)=(1 +MGR)x (I + cost of capital).
I refer readers to my earlier articles in Management Accounting (January 1997, October 1998 and June 1999), which look at the four measures of NPV, IRR, MIRR and MGR.
If, as may well be the ease in exceptional circumstances, a reinvestment rate is greater than the company's cost of capital, then the MIRR will underestimate a project's true rate of return.
CALCULATION OF THE MIRR Year Cash flow (f) 0 585,000 The net cash flows from the project for years one to 10 are compounded at the same rate as the cost of capital (8 per cent in this case) into a single figure for year 10.