Modified internal rate of return
The modified internal rate of return (MIRR) corrects the standard IRR by assuming interim cash inflows are reinvested at the cost of capital rather than the project's own IRR, producing a more realistic and reliable comparison rate.
FrameworkDCF investment appraisal
See it move
A three-year project costing €100,000 generates inflows of €50,000, €60,000 and €30,000. Compounded forward at the 10% cost of capital, those inflows reach a terminal value of €160,500. Dividing that terminal value by the €100,000 present value of the outflow and taking the cube root gives an MIRR of about 17.0% — lower than the project's standard IRR.
The formula
Variables
- Terminal value of inflows: all positive cash flows compounded forward to the end of period n at the reinvestment rate (cost of capital)
- Present value of all negative cash flows discounted at the financing rate
- Number of periods in the project
The MIRR corrects the standard IRR's unrealistic reinvestment assumption. Because interim inflows are reinvested at the cost of capital rather than the project's own rate, MIRR is always closer to the cost of capital than a high standard IRR.