MIRR Calculator

Introduction to the Modified Rate of Return Calculator

The Accurate Modified Internal Rate of Return Calculator allows users to set an assumed reinvestment rate.

• Exact date investments and withdrawals
• Easy bulk data entry

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Why do some investors use a MIRR calculation instead of the standard IRR calculation?

There are two issues with the IRR equation:

1. The equation can produce two different results for the same set of cash flows.
2. The equation assumes that positive cash flows are reinvested at the project’s IRR.

The modified internal rate of return (MIRR) formula avoids these problems. More below…

The modified internal rate of return is an annualized return measure that uses two rates: a financing rate for invested capital and a reinvestment rate for the project’s positive cash flows.

Whereas the IRR assumes that positive cash flows are reinvested at the IRR, the MIRR requires the user to enter the reinvestment rate they expect to earn on those positive cash flows.

In addition to the projected cash flows, the user sets four values:

• Finance Rate (Discount Rate)
• Reinvestment Rate
• Initial Investment Date
• Compounding Frequency

The finance rate is the interest rate you expect to pay when you borrow. This rate discounts the negative cash flows (investments). The NPV calculation also uses the finance rate to discount all cash flows, positive and negative.

The reinvestment rate is the rate of return you expect to earn on the project’s positive cash flows.

The initial investment date is the date you expect the project or investment to begin.

The compounding frequency must match the cash flow frequency. The MIRR calculation produces a compounded rate of return, while the IRR calculation assumes no compounding. With the IRR, cash flows may occur on any date. With the MIRR, cash flows must occur on compounding dates. Cash flows may be skipped, but they cannot occur in between compounding dates.

For example, if compounding is “Quarterly” and the “Initial Investment Date” is August 15, the only valid cash flow dates are November 15, February 15, and May 15. This is why the user cannot change the dates. The calculator determines valid dates for the cash flows.

The Internal Rate of Return (IRR) Calculator allows cash flows on any date.

See the Net Present Value (NPV) Calculator for details on the NPV result.

Wikipedia defines the MIRR as:

The formula adds up the negative cash flows after discounting them to time zero using the external cost of capital, adds up the positive cash flows including the proceeds of reinvestment at the external reinvestment rate to the final period, and then works out what rate of return would cause the magnitude of the discounted negative cash flows at time zero to be equivalent to the future value of the positive cash flows at the final time period.

The calculated result for “Proof” should be zero—that is, the discounted negative cash flows at time zero are equivalent to the future value of the positive cash flows at the final time period. If the value is not near zero, the result should be reviewed.

As with the IRR, the MIRR is intended for comparing mutually exclusive investment opportunities, not for measuring the return on a single investment in isolation.

All else equal, the investment with the higher MIRR is the better choice.

However, all else is rarely equal.