Modified Internal Rate of Return

Modified Internal Rate of Return (MIRR)

What Does Modified Internal Rate of Return (MIRR) Mean?

Whereas the internal rate of return (IRR) assumes that the cash flows from a project are reinvested at the IRR, the modified MIRR assumes that all cash flows are reinvested at the firm's cost of capital. Therefore, MIRR more accurately reflects the profitability of a project.

Investopedia explains Modified Internal Rate of Return (MIRR) As an example, if a two-year project with an initial outlay of $195 and a cost of capital of 12% returns $121 in the first year and $131 in the second year, one finds the IRR of the project so that the net present value (NPV) = 0 as follows: NPV = 0 = -195 + 121/(1+ IRR) + 131/(1 + IRR)²; NPV = 0 when IRR = 18.66% . However, using the MIRR method, the investor would substitute IRR with MIRR = cost of capital of 12%: NPV = -195 + 121/(1+ .12) + 131/(1 + .12)²; NPV = 17.47 when MIRR = 12%. Thus, using the IRR could result in a positive NPV (good project), but it could turn out to be a bad project (NPV is negative) as revealed by the MIRR method. Therefore, using MIRR versus IRR reflects the value of a project more comprehensively.

Related Terms:
• Discounted Cash Flow—DCF
• Internal Rate of Return—IRR
• Net Present Value—NPV
• Payback Period