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Calculate the modified internal rate of return (MIRR) with separate finance and reinvestment rates. Get more realistic investment returns than standard IRR.
MIRR is a financial metric that improves on IRR by using separate rates for financing costs and reinvestment returns, providing a more realistic measure of an investment's profitability.
Cost of capital
Return on reinvested cash
At reinvestment rate
At finance rate
| Year | Cash Flow | Terminal Value |
|---|---|---|
| 0 | -$100,000.00 | - |
| 1 | +$25,000.00 | $28,940.63 |
| 2 | +$30,000.00 | $33,075.00 |
| 3 | +$35,000.00 | $36,750.00 |
| 4 | +$40,000.00 | $40,000.00 |
| Total | $30,000.00 | $138,765.63 |
Terminal values are compounded at 5% reinvestment rate.
| Aspect | MIRR | IRR |
|---|---|---|
| Reinvestment | Realistic rate | At IRR itself |
| Solutions | Always unique | Can be multiple |
| Accuracy | More realistic | Can overstate |
| Complexity | Requires 2 rates | Single calculation |
Tip: MIRR is typically lower than IRR because it uses a realistic reinvestment rate. A lower MIRR that exceeds your cost of capital is still a good investment.
Formula
MIRR = (TV_positive ÷ PV_negative)^(1/n) − 1TV_positive = terminal value of positive cash flows compounded at reinvestment rate to end of project
PV_negative = present value of negative cash flows discounted at finance rate
n = total number of periods in the investment
Worked Example
$100K investment, $25K-$40K annual returns, 10% finance rate, 5% reinvestment rate, 4 years
Did you know? MIRR was introduced by Lin (1976) as a correction to IRR's reinvestment rate assumption. Finance textbook authors Brigham & Ehrhardt recommend MIRR over IRR for capital budgeting decisions.
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