MIRR Calculator (Modified IRR)
Print| Terminal Value of Cash Inflows | $0.00 |
While the traditional Internal Rate of Return (IRR) is widely used in capital budgeting, it suffers from a major mathematical flaw: it unrealistically assumes that all future cash inflows generated by a project can be reinvested at the project’s own high IRR. To solve this flaw and provide an accurate return metric, financial managers use the Modified Internal Rate of Return (MIRR).
Our free MIRR Calculator allows financial analysts, corporate controllers, and CFA students to evaluate project returns. By setting realistic external reinvestment rates and cost-of-capital financing rates, you can compare competing capital projects accurately.
How to Calculate MIRR
MIRR resolves the IRR reinvestment flaw by compounding positive cash flows forward to the end of the project at a realistic Reinvestment Rate, while discounting negative cash flows back to Year 0 at a Financing Rate (WACC).
The MIRR Formula:
MIRR = (Terminal Value of Inflows / Present Value of Outflows)¹⁄ᶘ - 1
- Terminal Value of Inflows: The sum of all positive cash inflows compounded forward to Year n at the Reinvestment Rate.
- Present Value of Outflows: The sum of all negative cash outflows discounted back to Year 0 at the Financing Rate.
- n: Total project duration in years.
MIRR vs. Standard IRR Comparison
| Feature | Standard IRR | Modified IRR (MIRR) |
|---|---|---|
| Reinvestment Assumption | Assumes cash inflows are reinvested at the internal IRR rate (Often unrealistically high). | Assumes cash inflows are reinvested at the company’s cost of capital (WACC). |
| Multiple Solutions Risk | Can produce multiple IRRs if cash flows alternate between positive and negative. | Always produces a single, unique rate of return. |
| Accuracy for Ranking | Often overstates project returns. | Provides conservative, realistic capital budgeting returns. |
Step-by-Step Capital Budgeting Example
Imagine a company evaluating a 3-year expansion project requiring an initial investment of $100,000.
- Year 1 Cash Inflow: $50,000
- Year 2 Cash Inflow: $60,000
- Year 3 Cash Inflow: $40,000
- Company Cost of Capital (Financing & Reinvestment Rate): 10% (0.10)
Step 1: Calculate Terminal Value of Inflows at Year 3
Year 1 Inflow: $50,000 × (1.10)² = $60,500
Year 2 Inflow: $60,000 × (1.10)¹ = $66,000
Year 3 Inflow: $40,000 × (1.10)∄ = $40,000
Terminal Value = $60,500 + $66,000 + $40,000 = $166,500
Step 2: Calculate MIRR
MIRR = ($166,500 / $100,000)¹⁄³ - 1
MIRR = (1.665)∄.³³³ - 1 = 1.1852 - 1 = 18.52%
While standard IRR overstates return at 22.8%, the realistic MIRR is 18.52%.
Frequently Asked Questions (FAQ)
Why is MIRR better than standard IRR?
MIRR reflects cost of capital reality. In real-world business, companies reinvest cash flows in standard treasury or money-market instruments yields (e.g., 8-10%), not at extraordinary project IRR rates like 45%.
When should a company accept a project based on MIRR?
A company should accept an independent project if its MIRR is greater than the company’s hurdle rate / cost of capital (WACC).
Can MIRR be calculated in Excel?
Yes. Excel provides a built-in MIRR function: =MIRR(values, finance_rate, reinvest_rate).