Modified internal rate of return (MIRR)
Modified internal rate of return (MIRR) assumes that positive cash flows are reinvested at the firm’s cost of capital. By contrast, the internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR.
(Source: Wkipedia Image)
PV is present value (at the beginning of the first period)
FV is future value (at the end of the last period).
Advantages of MIRR over Internal Rate of Return (IRR):
- More than one IRR can be found for projects with alternating positive and negative cash flows, which leads to wrong decision. MIRR finds only one value.
- Under IRR, it assumes that interim positive cash flows are reinvested at the same rate of return as that of the project that generated them. This is unrealistic scenario. Generally for comparing projects more fairly, the weighted average cost of capital should be used for reinvesting the interim cash flows.