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Asked Oct 23, 2019
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What is MIRR - Modified Internal Rtae of Return?  Please provide example.  

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Expert Answer

Step 1

One of the pitfall method of conventional IRR is the fact that it assumes cash flows are reinvested at the internal rate of return.

MIRR is the concept in capital budgeting introduced to take out this shorfall in the way IRR is calculated. It's the modifed form of IRR calculaton where project cash flows can be reinvested at a rate different than the internal rate of return.

Step 2

We can calculate MIRR using the following approach:

  • First find future value of all cash inflows at the end of the project using an appropriate reinvestment rate,
  • Then calculate the present value of all cash outflows at the relevant discount rate at the start of the period
  • Use the formula shown below to work out the MIRR over the n periods:
  • MIRR = (FVCI/PVCO)(1/n) - 1 where FVCI is the sum of future values of all net cash flows at the end of the project, PVCO is the present value of all the initial or future investment, and n is the number of periods
Step 3

As an example, consider the cash flows on the white board. The reinvestment rate is 12%...

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