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

Definition: MIRR is a financial metric that calculates the return on investment while accounting for the cost of capital and the reinvestment rate of cash flows.

Purpose: It provides a more accurate reflection of an investment's profitability than the standard IRR by assuming reinvestment at the firm's cost of capital.

2. How Does the MIRR Calculator Work?

The calculator uses the formula:

Where:

• MIRR — Modified internal rate of return (decimal)
• FV_p — Future value of positive cash flows (USD)
• PV_n — Present value of negative cash flows (USD)
• n — Number of periods (dimensionless)

Explanation: The ratio of future value of positive cash flows to present value of negative cash flows is raised to the power of 1/n periods, then 1 is subtracted.

3. Importance of MIRR Calculation

Details: MIRR helps investors and financial analysts make better capital budgeting decisions by addressing the limitations of IRR, particularly regarding reinvestment rate assumptions.

4. Using the Calculator

Tips: Enter the future value of positive cash flows, present value of negative cash flows (both in USD), and the number of periods. All values must be > 0.

5. Frequently Asked Questions (FAQ)

Q1: How is MIRR different from IRR?
A: MIRR assumes reinvestment at the firm's cost of capital rather than the IRR itself, making it more realistic.

Q2: What's a good MIRR value?
A: Generally, MIRR should exceed the company's cost of capital to be considered a good investment.

Q3: When should I use MIRR instead of IRR?
A: Use MIRR when cash flows are unconventional (multiple sign changes) or when you want more conservative reinvestment assumptions.

Q4: How do I calculate FV_p and PV_n?
A: FV_p is the sum of positive cash flows compounded at reinvestment rate. PV_n is the sum of negative cash flows discounted at finance rate.

Q5: Can MIRR be negative?
A: Yes, if the present value of costs exceeds the future value of benefits, indicating a loss.