The Modified Internal Rate of Return (MIRR) is a financial metric used to evaluate the profitability of an investment. Unlike the traditional Internal Rate of Return (IRR), which can give misleading results when cash flows are non-conventional, MIRR provides a more accurate reflection of an investment’s potential by considering the cost of financing and the reinvestment rate of cash flows.

To calculate MIRR, you need to input the cash flows associated with the investment, the finance rate, and the reinvestment rate. The cash flows should be entered as a comma-separated list, where positive values represent cash inflows and negative values represent cash outflows. The finance rate is the cost of borrowing funds, while the reinvestment rate is the rate at which cash inflows are assumed to be reinvested.

MIRR Calculation Formula

The formula for calculating MIRR is as follows:

MIRR = (PV of Positive Cash Flows / |PV of Negative Cash Flows|)^(1/n) - 1

Where:

  • PV of Positive Cash Flows is the present value of all positive cash flows discounted at the reinvestment rate.
  • PV of Negative Cash Flows is the present value of all negative cash flows discounted at the finance rate.
  • n is the total number of cash flows.

By using this formula, investors can determine the effective rate of return on their investments, taking into account the timing and magnitude of cash flows.

Why Use MIRR?

MIRR is particularly useful for comparing investments with different cash flow patterns. It provides a single rate of return that reflects the true profitability of an investment, making it easier to compare with other investment opportunities. Additionally, MIRR addresses some of the limitations of IRR, such as the assumption that cash inflows are reinvested at the same rate as the IRR itself.

How to Use the MIRR Calculator?

To use the MIRR calculator, follow these steps:

  1. Input your cash flows in the designated field, separating each value with a comma.
  2. Enter the finance rate as a percentage in the corresponding field.
  3. Input the reinvestment rate as a percentage.
  4. Click the “Calculate” button to obtain the MIRR result.
  5. If needed, you can reset the fields to start a new calculation.

Example Calculation

Consider an investment with the following cash flows: -$10,000 (initial investment), $3,000 (Year 1), $4,000 (Year 2), $5,000 (Year 3). If the finance rate is 8% and the reinvestment rate is 10%, you would enter these values into the calculator to find the MIRR.

FAQ

1. What is the difference between IRR and MIRR?

IRR assumes that cash inflows are reinvested at the same rate as the IRR, while MIRR assumes reinvestment at a specified reinvestment rate, providing a more realistic measure of an investment’s profitability.

2. Can MIRR be negative?

Yes, if the present value of negative cash flows exceeds the present value of positive cash flows, the MIRR can be negative, indicating a loss on the investment.

3. Is MIRR suitable for all types of investments?

MIRR is particularly useful for projects with non-conventional cash flows, but it can be applied to any investment analysis to provide a clearer picture of profitability.

4. How can I learn more about financial calculations?

For more financial calculators, you can check out the following resources: DBH Calculator, Gram to Vori Calculator, and AP Physics C EM Score Calculator.