Modified Internal Rate of Return (MIRR)

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Also known as: MIRR

The modified internal rate of return (MIRR) is a version of the internal rate of return that assumes cash flows from a project are reinvested at a chosen rate, usually the cost of capital, rather than at the project's own internal rate of return.

The standard internal rate of return implicitly assumes that cash produced by a project can be reinvested at the same rate as the project itself. For very profitable projects, this can overstate the true return. MIRR fixes this by using a more realistic reinvestment rate.

To calculate MIRR, positive cash flows are compounded forward to the end of the project at the reinvestment rate, negative cash flows are discounted to the start at the financing rate, and MIRR is the rate that links the two.

For example, a project costs 1,000 and returns 600 at the end of each of the next two years. Its IRR is about 13.1%. If cash can be reinvested at 8%, the first 600 grows to 648 by the end of year two, giving a total of 1,248. The MIRR is about 11.7%.

MIRR also avoids the problem of projects with unusual cash flows having more than one IRR. It is usually considered alongside net present value, which remains the most reliable measure of value.

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