What it means
Ordinary IRR (internal rate of return, the discount rate that makes a project's net present value equal zero) has two well-known weaknesses. It quietly assumes every inflow is reinvested at the IRR itself, which can be unrealistically high, and it can produce several answers when cash flows switch between positive and negative.
MIRR fixes both problems. It takes all the positive cash flows and compounds them forward to the end of the project at a reinvestment rate, usually the company's cost of capital or a safe market return.
It then takes all the negative cash flows and discounts them back to today at a financing rate, which reflects what the company pays to borrow. Dividing the future value of the inflows by the present value of the outflows and taking the root for the number of years gives one clean annual rate.
Finance teams use MIRR to compare projects and to check whether an exciting IRR survives realistic assumptions. A project showing a 30% IRR may look much more modest on a MIRR basis if cash can only be reinvested at 8%.
MIRR is still not perfect. It depends on the two rates you choose, so different assumptions give different answers, and like IRR it can mislead when comparing projects of very different sizes, where NPV (net present value) is often the better guide.
A useful habit is to report IRR, MIRR and NPV side by side for any large project. If the three tell the same story the decision is easy, and if MIRR is far below IRR it is a prompt to ask what reinvestment assumption is hiding in the headline number.
In practice
Real-world examples.
Example
A manufacturer compares two machine purchases. Machine A has a higher IRR but produces most of its cash early, and the MIRR comparison shows Machine B is better once cash is reinvested at the company's 9% cost of capital. The finance team presents both figures so the board can see why the ranking flipped.
Example
A property developer has a project with a large cash outflow in year 3 for refurbishment. Standard IRR gives two possible answers, while MIRR gives one clear figure for the investment committee. The committee can now compare it directly with its hurdle rate.
Example
A telecommunications company tests a network upgrade whose headline IRR is 28%. After applying a 7% reinvestment rate the MIRR falls to 16%, still above the hurdle rate but far less dramatic.
Formula
Calculation
MIRR = (FV of positive cash flows at the reinvestment rate / PV of negative cash flows at the financing rate) ^ (1 / n) - 1
A project costs $100,000 today and returns $40,000, $50,000 and $60,000 at the end of years 1, 2 and 3. Assume a 10% reinvestment rate and an 8% financing rate (the single outflow is today, so no discounting is needed). The future value of the inflows at the end of year 3 is $40,000 x 1.10 x 1.10 + $50,000 x 1.10 + $60,000 = $48,400 + $55,000 + $60,000 = $163,400. The ratio is $163,400 / $100,000 = 1.634, and the cube root of 1.634 is about 1.178, so MIRR is about 1.178 - 1 = 17.8% a year.Case study
Seen in the real world.
Brightwater Energy is an illustrative, fictional solar developer choosing between two $2,000,000 projects. Project Sun showed a 25% IRR and Project Wind showed 21%, so the board leaned towards Sun. Both projects had the same cost and the same three-year life.
The finance manager recalculated using MIRR, with a 6% reinvestment rate reflecting what surplus cash could earn and an 8% financing rate. Sun returned most of its cash in the first two years, so reinvesting at 6% dragged its MIRR down to 14.5%, while Wind's steadier cash flows gave a MIRR of 15.2%.
The board chose Wind. In this fictional story the decision rested not on a better headline number but on a more honest assumption about what the company could do with the cash it received.
Watch out
Common mistakes.
- Using the same rate for reinvestment and financing without thinking, which removes the point of having two assumptions.
- Treating MIRR as a replacement for NPV, when NPV is still the more reliable guide to value created.
- Forgetting to compound positive cash flows forward to the end of the project, which gives a wrong ratio.
Questions
People also ask.
Is MIRR always lower than IRR?
Not always, but when IRR is higher than the reinvestment rate, MIRR is usually lower because the reinvestment assumption is more cautious.
What reinvestment rate should I use?
Commonly the company's cost of capital or the return available on similar safe investments, and you should state it clearly.
Can I calculate MIRR in a spreadsheet?
Yes, spreadsheet programs have a MIRR function that takes the cash flows, the financing rate and the reinvestment rate. Check the order of the two rates in your program's help text, because mixing them up changes the answer.
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