MIRR Calculator (Modified Internal Rate of Return)

The MIRR calculator helps you calculate the project’s IRR If you reinvest all profits yearly.

The modified internal rate of return is a way to figure out how good an investment is from a financial point of view. It ranks different investments of the same size in capital budgeting.

MIRR is a change to the internal rate of return, as the name suggests. As such, it tries to fix some problems with the IRR.

You might be interested in finding doubling time or impairment payout options.

What is the Modified Internal Rate of Return (MIRR)?

The Modified Internal Rate of Return (MIRR) is a financial metric that provides a more realistic assessment of an investment’s potential return compared to the traditional Internal Rate of Return (IRR). MIRR takes into account two important factors that the IRR overlooks: the cost of capital and the reinvestment rate of positive cash flows.

MIRR calculates the rate of return that equates the present value of an investment’s costs with the future value of its returns, assuming that positive cash flows are reinvested at a specified rate and negative cash flows are financed at the firm’s cost of capital.

Why Use MIRR Instead of IRR?

While the Internal Rate of Return (IRR) is a widely used metric in financial analysis, it has some limitations that MIRR addresses:

1. Reinvestment assumption: IRR assumes that all cash flows are reinvested at the IRR itself, which may not be realistic. MIRR allows for a more practical reinvestment rate.
2. Multiple IRR problem: In some cases, projects with non-conventional cash flows can have multiple IRR solutions. MIRR provides a single, unambiguous solution.
3. Cost of capital consideration: MIRR incorporates the firm’s cost of capital for financing negative cash flows, providing a more accurate picture of the investment’s profitability.

How to Calculate MIRR

The MIRR calculation involves several steps:

1. Determine the present value of negative cash flows (including the initial investment) using the finance rate.
2. Calculate the future value of positive cash flows using the reinvestment rate.
3. Use the MIRR formula to find the rate that equates these values over the investment period.

The MIRR formula is:

MIRR = (Future Value of Positive Cash Flows / Present Value of Negative Cash Flows)^(1/n) – 1

Where:

• n is the number of periods

Using the MIRR Calculator

Our MIRR calculator simplifies the process of determining the Modified Internal Rate of Return for your investment projects. Here’s how to use it:

1. Enter the finance rate (%) – This is typically the firm’s cost of capital.
2. Input the reinvestment rate (%) – The rate at which positive cash flows are assumed to be reinvested.
3. Specify the initial investment amount ($).
4. Enter the annual cash flows for up to five years.
5. Click the “Calculate MIRR” button to get the result.

The calculator will display the MIRR as a percentage, giving you a clear indicator of the investment’s potential return.

Interpreting MIRR Results

When analyzing the MIRR results, consider the following:

1. Comparison to hurdle rate: If the MIRR exceeds your required rate of return or hurdle rate, the investment may be considered favorable.
2. Relative analysis: Compare the MIRR of different investment opportunities to identify the most promising options.
3. Sensitivity analysis: Adjust the finance and reinvestment rates to see how they affect the MIRR, providing insights into the investment’s risk and potential outcomes.

MIRR vs. IRR: A Practical Example

Let’s consider a project with the following cash flows:

• Initial investment: $10,000
• Year 1: $2,000
• Year 2: $3,000
• Year 3: $4,000
• Year 4: $5,000
• Year 5: $6,000

Assume a finance rate of 8% and a reinvestment rate of 10%.

Using our MIRR calculator, we find that the MIRR for this project is approximately 13.76%.

Now, let’s calculate the IRR for the same project:

IRR ≈ 23.22%

The significant difference between MIRR (13.76%) and IRR (23.22%) demonstrates how the two metrics can lead to different conclusions about an investment’s profitability. The MIRR provides a more conservative and often more realistic estimate by considering the actual cost of capital and reinvestment rates.

Advantages of Using MIRR

1. Realistic assumptions: MIRR uses more practical assumptions about reinvestment rates and financing costs.
2. Single solution: Unlike IRR, MIRR always provides a single, unambiguous solution.
3. Comprehensive analysis: By incorporating both the cost of capital and reinvestment rate, MIRR offers a more complete picture of an investment’s potential.
4. Flexibility: Users can adjust finance and reinvestment rates to reflect different scenarios and market conditions.

Limitations of MIRR

While MIRR addresses many of IRR’s shortcomings, it’s important to be aware of its limitations:

1. Complexity: MIRR is more complex to calculate manually compared to IRR, which is why calculators like ours are valuable tools.
2. Assumption sensitivity: The choice of finance and reinvestment rates can significantly impact the MIRR result, requiring careful consideration of these inputs.
3. Limited time horizon: Like IRR, MIRR assumes a fixed time horizon and doesn’t account for potential changes in project duration.

MIRR in Excel

For those who prefer using spreadsheet software, Microsoft Excel provides a built-in function for calculating MIRR. The syntax is:

=MIRR(values, finance_rate, reinvest_rate)

Where:

• values: The range of cells containing cash flows
• finance_rate: The rate used to finance negative cash flows
• reinvest_rate: The rate at which positive cash flows are reinvested

Using Excel can be helpful for more complex projects or when you need to integrate MIRR calculations into larger financial models.

Practical Applications of MIRR

The Modified Internal Rate of Return has several practical applications in finance and investment analysis:

1. Capital budgeting: MIRR helps companies evaluate and prioritize potential investment projects.
2. Investment comparison: Investors can use MIRR to compare different investment opportunities on a more level playing field.
3. Portfolio management: Fund managers may incorporate MIRR into their analysis when selecting and managing investments.
4. Business valuation: MIRR can be used as part of the process of valuing businesses or specific business units.
5. Real estate investment: Property investors can use MIRR to assess the potential returns of real estate projects.