MIRR

Modified Internal Rate of Return

Short definition

MIRR evaluates interim cash at a separate reinvestment (and, if needed, finance) rate rather than at the IRR. It makes IRR’s hidden reinvestment assumption explicit.

Detailed explanation

Inflows are typically compounded to a terminal date at WACC or a conservative treasury rate; outflows are discounted at the finance cost. The ratio of that terminal value to I₀ is then annualised.

It also removes most multiple-IRR cases by collapsing flows into one TV and one PV. An optimistic reinvestment rate inflates MIRR just as IRR does; the rate should not be detached from market yields.

Why it matters for the CFO

When management quotes a 40% project IRR, interim cash often cannot be reinvested at 40% in the local money market. MIRR cuts that exaggeration.

How it is calculated

MIRR = (TV / |I₀|)^(1/n) − 1

Inflows compound to TV at the reinvestment rate; outflows discount to PV at the finance rate; MIRR is the annual compound yield between those stocks.

Variables in the formula

• TV: terminal value of inflows compounded at the reinvestment rate
• I₀: PV of outflows at the finance rate (or initial outlay)
• n: number of years

How to read it

If MIRR sits between IRR and WACC, the reinvestment assumption was inflating IRR. The decision remains NPV; MIRR is a communication tool.

Numerical example

I₀ = 10 mn TL, three inflows of 5 mn TL, reinvestment 15%, n = 3: TV ≈ 5×1.15² + 5×1.15 + 5 ≈ 17.36; MIRR ≈ (17.36/10)^(1/3) − 1 ≈ 20%.

Definitions are educational. They are not investment, credit or tax advice.