1. What is 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 traditional 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)
• \( FV_{\text{positive}} \) — Future value of positive cash flows (USD)
• \( PV_{\text{negative}} \) — Present value of negative cash flows (USD)
• \( n \) — Number of periods (years)

Explanation: The ratio of future positive cash flows to present negative cash flows is raised to the power of 1/n (where n is the number of periods), then 1 is subtracted to get the MIRR.

3. Importance of MIRR in Finance

Details: MIRR provides a more realistic measure of an investment's attractiveness by:

• Assuming reinvestment at the firm's cost of capital rather than IRR
• Eliminating the multiple IRR problem
• Providing better comparison between projects

4. Using the MIRR Calculator

Tips:

• FV of Positive Cash Flows: Sum of all positive cash flows compounded at reinvestment rate
• PV of Negative Cash Flows: Sum of all negative cash flows discounted at finance rate
• Number of Periods: Total duration of the investment in years

5. Frequently Asked Questions (FAQ)

Q1: How is MIRR different from IRR?
A: MIRR assumes reinvestment at a specified rate (usually cost of capital) while IRR assumes reinvestment at the IRR itself, which is often unrealistic.

Q2: When should I use MIRR instead of IRR?
A: Use MIRR when you want a more conservative estimate or when comparing projects with different cash flow patterns.

Q3: What's a good MIRR value?
A: A MIRR higher than your cost of capital indicates a potentially good investment. The higher the MIRR, the better.

Q4: How do I calculate FV of positive cash flows?
A: Sum each positive cash flow compounded at the reinvestment rate for the remaining periods.

Q5: How do I calculate PV of negative cash flows?
A: Sum each negative cash flow discounted at the finance rate for the period it occurs.