Modified Internal Rate of Return

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.

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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