Calculate the Modified Internal Rate of Return from a cash-flow series with separate finance and reinvestment rates.
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Capital Budgeting
The Modified Internal Rate of Return (MIRR) addresses a key flaw in traditional IRR by using separate rates for financing costs and reinvestment of cash inflows, producing a single, realistic rate of return for project evaluation.
Traditional IRR assumes all intermediate cash flows are reinvested at the IRR itself, which is often unrealistic. A project with a 50% IRR does not mean you can reinvest interim cash at 50%.
MIRR separates the cost of financing negative cash flows (at the company’s cost of capital) from the return earned by reinvesting positive cash flows (at a realistic reinvestment rate), giving a more conservative and accurate performance measure.
MIRR combines terminal value of inflows and present value of outflows.
MIRR = (FV of inflows / |PV of outflows|)^(1/n) − 1
Inflows compounded forward at the reinvestment rate. Outflows discounted back at the finance rate. n = number of periods.
Cash flows: −100,000, 30,000, 35,000, 40,000, 45,000. Finance rate 8%, reinvestment rate 10%. FV of inflows at 10%: 30,000×1.1³ + 35,000×1.1² + 40,000×1.1 + 45,000. PV of outflows at 8%: −100,000. MIRR = (FV/100,000)^(1/4) − 1.
Still requires assumptions about finance and reinvestment rates. Does not handle multiple sign changes as elegantly as NPV. The single-rate output can mask the timing and magnitude of cash flows.
Frequently asked questions
Use MIRR when the project’s IRR significantly exceeds realistic reinvestment rates, when comparing projects of different sizes or durations, or when cash flow patterns produce multiple IRR solutions.
Finance rate: typically your WACC or borrowing cost. Reinvestment rate: the return you can realistically earn on interim cash flows — often a conservative estimate like your WACC or a money market rate.
Usually yes, because MIRR uses a realistic reinvestment rate rather than the (often inflated) IRR. If the reinvestment rate equals the IRR, then MIRR = IRR.
Yes. A negative MIRR means the project destroys value — the terminal value of inflows is less than the present value of outflows.
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