Definition
MIRR addresses IRR's unrealistic assumption that interim cash flows are reinvested at the IRR rate. Instead, MIRR uses the cost of capital for reinvestment and the finance rate for borrowing. This produces a single, more realistic rate of return. MIRR always gives a unique solution, unlike IRR which can have multiple solutions.
functions Formula
MIRR = (FV of positive CFs at reinvestment rate / PV of negative CFs at finance rate)^(1/n) − 1
lightbulb Example
Invest $100K, receive $40K/year for 4 years, reinvestment rate 8%. FV = $40K×(1.08³ + 1.08² + 1.08 + 1) = $180.6K. MIRR = ($180.6K/$100K)^(1/4) − 1 = 15.9%.
verified_user Key Points
- Fixes IRR's reinvestment rate flaw
- Always produces a unique solution
- More conservative than IRR
- Widely used in real estate and project finance