How is MIRR Calculated?

What is MIRR and How is it Calculated?

The Modified Internal Rate of Return (MIRR) is calculated by first determining the future value of positive cash flows at a reinvestment rate and the present value of negative cash flows at a financing cost. These values are then used in the MIRR formula, where the future value of positive cash flows is divided by the present value of negative cash flows, raised to the power of one over the total number of periods, and then subtracting one. This method provides a more nuanced measure of an investment's profitability than the traditional IRR by accounting for both the cost of investment and the return on reinvested earnings.

Here are the steps to calculate MIRR:

1. Future Value of Positive Cash Flows: First, calculate the future value (FV) of all positive cash flows (such as income or end-of-project proceeds) at the end of the investment period using a reinvestment rate. This rate is often the company's cost of capital or another rate reflective of the return on reinvested funds.
2. Present Value of Negative Cash Flows: Then, calculate the present value (PV) of all negative cash flows (like initial investment or costs) at the beginning of the investment period. This is usually discounted at the financing cost or the cost of borrowing.
3. MIRR Formula: Finally, the MIRR is calculated using the formula:

Here, n represents the total number of periods (years, quarters, etc.).

This approach modifies the traditional Internal Rate of Return (IRR) by considering both the cost of the investment and the interest earned on reinvestments, providing a more accurate reflection of the investment's profitability and efficiency.