Modified Internal Rate Of Return Calculator | MIRR Calculator

Use the Modified Internal Rate Of Return Calculator to measure of an investment's attractiveness. Modified Internal Rate Of Return (MIRR) is used in capital budgeting to rank alternative investments of equal size. As the name implies, MIRR is a modification of the internal rate of return (IRR).

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Modified Internal Rate Of Return (MIRR)
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Modified Internal Rate Of Return (MIRR) Measures The Profitability Of Your Projects in an Improved Way

As the name suggests the modified internal rate of return is the improved version of the profitability measure known as Internal Rate of Return (IRR). The MIRR assumes that positive cash flows are reinvested at the firm's cost of capital or a steady reinvestment rate.

It helps you in gauging the attractiveness of an investment as well as for comparing various investments MIRR is one of the best financial instruments. MIRR is designed to generate one solution, eliminating the issue of multiple IRRs. Let's see how it is different than IRR.

MIRR vs. IRR

Modified Internal Rate Of Return Calculator. This image provides details of how to calculate Modified Internal Rate Of Return ratio using a calculator and notepad. By using the Modified Internal Rate Of Return Ratio formula, the Modified Internal Rate Of Return Calculator provides a true calculation of the attractiveness of an investment as well as for comparing various investments MIRR is one of the best financial instruments.

The MIRR and the IRR are very closely related financial terms. The IRR misinterprets some factors that are rectified in MIRR ratio calculations. One of the major issues in IRR calculation is that it assumes that the obtained positive cash flows get reinvested at the rate of their generation. On the other hand, the considerations in MIRR calculation allows for the fact that the proceeds from the positive flows of cash, get reinvested at an external rate of return. This external rate of return is most of the times, equal to the cost of capital of the company.

It is considered that the MIRR provides a better picture of the return one can expect from an investment. This is not the case with the standard IRR calculations. Thus, MIRR is most of the times lower than the IRR.

The internal rate of return is an interest rate at which Net present value (NPV) is equal to zero, whereas MIRR is the rate of return at which NPV of terminal cash inflows is equal to the outflows (i.e. investment). MIRR can be calculated manually as well as with the help of an online calculator such as modified internal rate of return calculator by iCalculator; the method to use the calculator is explained below.

How To Use The Mirr Calculator To Evaluate Your Projects

There are basically three variables that you should take into consideration for the calculation of MIRR:

  • The future value of positive cash flows which gets discounted at the same rate as the reinvestment rate.
  • The present value of negative cash flows which gets discounted at the financing rate.
  • The number of periods.

You can calculate MIRR by using the following formula:

MIRR = [ (FV (reinvestment rate) /PV (finance rate)](1/n) - 1

On the basis of the above inputs, the calculator will provide you with MIRR ratio for your project.

The MIRR calculator is an online tool designed by iCalculator in a way that allows you to calculate the MIRR ratio at the comfort of your home or office.

You can calculate MIRR manually and even using the spreadsheets but the process is quite complicated. Using the calculator is really easy and saves you effort and time. Additionally, the calculator allows you to enter a huge number of cash flow periods. This can be very useful in evaluating big projects. Let's find out how evaluation the projects by MIRR method can be useful.

Advantages of using MIRR calculations

The MIRR ratio of assessing the profitability of your projects can be a really useful tool in various ways, because:

  • You can use the MIRR to compare various projects, the only condition being, all of them have to be mutually exclusive. The project with higher MIRR ratios will be the most appealing one.
  • MIRR is capable of overcoming the two major drawbacks of IRR. It eliminates multiple IRRs in those investments which have unusual timing of the cash to flow in.
  • The MIRR also helps to measure the sensitivity of a typical investment towards any kind of change in the cost of capital.

Even though the MIRR calculations are quite useful, let's take a look at some of the drawbacks of this method.

The limitation of using MIRR calculations

Though MIRR is a better financial tool, for calculating the attractiveness of an investment, it also has certain limitations:

  • MIRR can also lead to the sub-optimal making of decisions when there are many investments to consider. MIRR is not capable of providing a numerical value to the effect of various investments on the financial condition of the investors.
  • People who belong to non-financial backgrounds, often find it difficult to understand the concept of MIRR.

Conclusion

The MIRR is used for capital budgeting, to understand whether an investment would be viable or not. If the MIRR of a project is higher than the returns expected from it, the investment will be considered attractive. On the other hand, if the MIRR is less than the return expected, it is better not to undertake that project.