This MIRR calculator (Modified Internal Rate of Return) helps you find out what is the IRR of an individual project, assuming that all profits will be reinvested each year. It is a modified version of our IRR calculator that allows you to specify not only the value of each cash flow, but also the interest rate at your financing loan and reinvestment account. Read on to learn how to calculate the MIRR and to discover a handy MIRR formula.
MIRR, or Modified Internal Rate of Return, is a variation of the IRR metric. Similarly, it shows you what return (expressed as a percentage of the initial investment) you can expect on a given project. Knowing the IRR or MIRR, you can easily compare mutually exclusive investments and choose the one that is most profitable.
Just like the IRR calculator, the MIRR calculator takes into account the present value of each cash flow. The main difference between these two metrics lies in the approach to the cash inflows: in MIRR, we assume that each cash inflow is reinvested at a steady rate, called the reinvestment rate.
The MIRR formula is substantially different from the IRR formula - you will notice that, while the future value of positive cash flows is still taken into consideration, the MIRR metric is not that similar to the NPV equation.
MIRR = [(FV(positive cash flows, reinvestment rate) / PV(negative cash flows, finance rate)] ^ (1/n) - 1
What are all the elements of this equation? Let's list them here:
n is the number of time periods (typically, years) between now and the end of the project.
FV stands for the future value of all positive cash flows. Every positive cash flow will be reinvested, increasing your total profit. The formula for FV is:
FV = ∑ [Cᵢ * (1 + RR)ⁿ⁻ⁱ]
PV = C₀ - ∑ [Cᵢ / (1 + FR)ⁱ]
RR is the reinvestment rate - an interest rate expressed as a percentage.
FR is the finance rate.
Remember that you have to include only the positive Cᵢ
terms when calculating the FV
value, and only the negative Cᵢ
terms when calculating the PV
value!
As the formula is quite complicated, we strongly suggest using our MIRR calculator instead of determining its value by hand. In the advanced mode, this tool can process up to 9 cash flows.
Let's try to find the value of the MIRR metric for the following case:
time | Cash flow |
---|---|
initial investment | $10,000 |
year 1 | $6000 |
year 2 | -$4000 |
year 3 | $8000 |
year 4 | $3000 |
year 5 | $7000 |
We will assume the financing rate of 10% and the reinvestment rate of 12%. The number of years n = 5
.
FV = 6000 * (1 + 0.12)⁴ + 8000 * (1 + 0.12)² + 3000 * (1 + 0.12) + 7000 = $29,836
PV = 10000 - (-4000) / (1 + 0.10)² = $13,306
MIRR = [FV / PV] ^ (1/n) - 1
MIRR = [29,836 / 13,306] ^ (1/5) - 1
MIRR = 17.53%
The MIRR of this case is equal to 17.53%. By comparison, the IRR metric is equal to 24.38%. These two values are significantly different; remember that by no means can they be used interchangeably!
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