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MIRR Definition > Formula > Example > Calculation > Calculator > Interpolation

Here we will have an in depth view of the way Modified Internal Rate of Return or MIRR is used to decide financial viability of an investment. You will find a definition, formula, example, calculation with MIRR along with a handy calculator. Stop wasting time with crappy templates - we bet, here you will find all you need!

How do you define MIRR?

Modified Internal Rate or Return or MIRR is the investor's required rate of return which equates the Initial Cost Outlay with the present value of Terminal Value. In other words MIRR is the rate at which the difference between ICO and present value of future value of cash inflows in zero.

What is the formula for MIRR?

MIRR Example

Let us illustrate finding Modified Internal Rate of return with an example investment proposal. Let us say you were offered a series of cash inflows at the end of each of the next four years as $5000, $4000, $3000, and $1000 at a discount rate of 10%. We assume the Initial Cost Outlay for this proposal is $10,000.

Initial MIRR Guess

We need to start off finding the future value of series of the cash inflows at a rate or return that we will arbitrarily guess to be 10%. If the Present Value of this Terminal value is higher than the initial cash outlay we will take a second guess at a higher rate or return otherwise we will chose the second rate to be smaller value than our first guess.

Year	NET CASH FLOW	FVIF @ 10%	FUTURE VALUE
PV at 10%
1	5000	1.331	$6,655
2	4000	1.210	$4,840
3	3000	1.100	$3,300
4	1000	1.000	$1000
		Terminal Value	$15,795
		PVIF @ 10%	0.6830
		PV of TV	$10,788
		10,788-10,000	$788

MIRR Guess 2nd Time

As you notice at 10% discount rate PV of TV is $788 more than the Initial Cost Outlay, we will second guess the new rate to bring down the PV of TV to a value lower than $10,000 or our initial cost outlay. We have selected 15% rate of return as you see in the table below

Year	NET CASH FLOW	FVIF @ 10%	FUTURE VALUE
PV at 15%
1	5000	1.331	$6,655
2	4000	1.210	$4,840
3	3000	1.100	$3,300
4	1000	1.000	$1000
		Terminal Value	$15,795
		PVIF @ 15%	0.5715
		PV of TV	$9,031
		9,031-10,000	($969)

Linear Interpolation

This time we have a PV of TV that is $969 less than the initial cost outlay of $10,000. Thus we deduce the modified internal rate of return lies somewhere between 10% and 15%. Here we will need to use a process called Linear Interpolation to arrive at a close estimate of the original rate of return. The diagram below illustrates this process. As you notice we will add the rate of return at which we had a higher PV with the product of higher PV and delta rate or return ( the difference between the higher and lower rates we used ) and divided by delta PV ( the range of lower and higher PV we arrived at earlier ). The resulting value is our MIRR or Modified Internal Rate or Return