How to Calculate MIRR ?

Definition

MIRR, also termed as modified internal rate of return is used to measure the profitability of the amount that is invested using the cash flows, reinvestment rate and finance rate. Learn how to calculate MIRR step by step with this simple tutorial.

Example :

How to Calculate MIRR for an investment with reinvestment rate at 3 % and finance rate at 4 % with cashfows as follows?

Given,

Reinvestment Rate : 3%

Finance Rate : 4%

To Find,

Modified Internal Rate of Return

Solution:

MIRR Calculation and Example

Step 1 :

Find the Future values for Positive Cash Flows
Cash Flow x ( 1 + Reinvestment Rate ) ^{Difference in time period}
Cash Flow at Time 2.9 Time period = 3 - 2.9 = 0.1 Future values for 2.9 = 2000 x ( 1 + 0.03 )^0.1                                    = 2000 x ( 1.03 )^0.1                                    = 2000 x 1.0029602531457                                    = 2005.92
Cash Flow at Time 2 Time period = 3 - 2 = 1 Future values for 2= 7000 x ( 1 + 0.03 )¹                                   = 7000 x (1.003)¹                                   = 7000 x 1.03                                   = 7210
Add the positive Cash Flows 2005.92 + 7210 = 9215.92

Step 2 :

Calculate the present value of negative cash flows using the finance rate by discounting back to time =0
Net Present Value ( NPV ) = ΣPV_t PV_t = C_t / ( 1 + i )^t
Cash Flow at Time 3 i = 0.04 ( 1 + i )^t = ( 1 + 0.04 )³ = 1.124864
C_t = -333
PV_t = C_t / ( 1 + i )^t PV_t = -333 / 1.124864 = −296.04
NPV = ΣPV_t Here, we have only one negative cash flow, Hence, NPV = -296.04

Step 3 :

Calculate Modified Internal Rate of Return
FVPV Ratio = FV Positive Cash Flows / -PV of Negative Cashflows = 9215.92 / - ( - 296.04 ) = 9215.92 / 296.04 FVPV Ratio = 31.130658019187

Step 4 :

Maximum time = 3, we take the 3 root for FVPV ratio Root 3 = 3√31.130658019187 Root 3 = 3.1457878703848 Subtract 1, we get 3.1457878703848 - 1 = 2.1457878703848 MIRR = 214.58 %