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See Also Internal Rate of Return Modified Internal Rate of Return Regardless of an academic preference for NPV, surveys suggest that many executives prefer IRR over NPV. Obviously, managers find it intuitively more appealing to evaluate investments in terms of percentage rates of return than dollars of NPV. Based on this fact, we can devise a percentage evaluator that is better than the regular IRR - we can modify the IRR and make it a better indicator of relative profitability, thus better for use in capital budgeting. This new measure is called the Modified IRR or MIRR, and is defined as follows: 
Here COF refers to cash outflows or the cost of the project, and CIF refers to cash inflows . The left term is simply the present value of the investment outlays when discounted at the cost of capital, and the numerator of the right term is the compounded value of the inflows assuming that the cash inflows are reinvested at the cost of capital. The compounded value of the cash inflows is also called the terminal value or TV. The discount rate that forces the Present Value of the TV to equal the PV of the costs is defined as the MIRR If the investment costs are all incurred at t=0, and if the first operating inflow occurs at t=1, then the equation may be used
EXAMPLE 1 An investment with an initial cash out flow of $1,000 pays back $500 in the first year, $400 in the second year, $300 in the third year, and $100 in the fourth year. If the cost of capital is 10%, find the Modified Internal Rate of Return (MIRR) SOLUTION
We could use linear interpolation to find the MIRR, say we choose a rate of 15% for the above equation this results in a value of
Since PV of TV at 15% is below PV of Costs ($1000), we will choose a rate lower than 15 say 10% At 10% , PV of TV is above PV of Costs ($1000).
Now we will interpolate to find an approximation of MIRR at which PV of TV equals PV costs 
Using MS Excel to compute
MIRR
Returns the modified internal rate
of return for a series of periodic cash flows.
MIRR considers both the cost of the investment
and the interest received on reinvestment of
cash. Syntax MIRR(values,finance_rate,reinvest_rate) Values is an array or
a reference to cells that contain numbers. These
numbers represent a series of payments (negative
values) and income (positive values) occurring
at regular periods.
Finance_rate is the
interest rate you pay on the money used in the
cash flows. Reinvest_rate is the
interest rate you receive on the cash flows as
you reinvest them. Remarks
Examples Suppose you're a commercial
fisherman just completing your fifth year of
operation. Five years ago, you borrowed $120,000
at 10 percent annual interest to purchase a
boat. Your catches have yielded $39,000,
$30,000, $21,000, $37,000, and $46,000. During
these years you reinvested your profits, earning
12 percent annually. On a worksheet, your loan
amount is entered as -$120,000 in B1, and your
five annual profits are entered in B2:B6. To calculate the investment's
modified rate of return after five years: To calculate the modified rate of
return after three years: To calculate the five-year modified
rate of return based on a reinvest_rate of 14
percent |
