What is modified IRR?

What is Modified IRR?

Modified Internal Rate of Return (MIRR) is a financial measure used to assess the profitability of investments, enhancing the traditional Internal Rate of Return (IRR) by incorporating the cost of capital and the reinvestment rate for cash flows. Unlike IRR, which assumes that all cash flows generated by the project are reinvested at the project's own IRR, MIRR uses a more realistic approach by assuming that positive cash flows are reinvested at the firm's reinvestment rate and the initial investment costs are financed at the firm's finance rate. This provides a more accurate reflection of the investment's profitability and its potential impact on the firm's value, making MIRR a valuable tool for comparing different investment opportunities, especially in real estate and capital budgeting decisions.