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Use the Modified Internal Rate Of Return Calculator to measure of an investment's attractiveness. Modified Internal Rate Of Return (MIRR) is used in capital budgeting to rank alternative investments of equal size. As the name implies, MIRR is a modification of the internal rate of return (IRR).
|Modified Internal Rate Of Return (MIRR)|
As the name suggests the modified internal rate of return is the improved version of the profitability measure known as Internal Rate of Return (IRR). The MIRR assumes that positive cash flows are reinvested at the firm's cost of capital or a steady reinvestment rate.
It helps you in gauging the attractiveness of an investment as well as for comparing various investments MIRR is one of the best financial instruments. MIRR is designed to generate one solution, eliminating the issue of multiple IRRs. Let's see how it is different than IRR.
The MIRR and the IRR are very closely related financial terms. The IRR misinterprets some factors that are rectified in MIRR ratio calculations. One of the major issues in IRR calculation is that it assumes that the obtained positive cash flows get reinvested at the rate of their generation. On the other hand, the considerations in MIRR calculation allows for the fact that the proceeds from the positive flows of cash, get reinvested at an external rate of return. This external rate of return is most of the times, equal to the cost of capital of the company.
It is considered that the MIRR provides a better picture of the return one can expect from an investment. This is not the case with the standard IRR calculations. Thus, MIRR is most of the times lower than the IRR.
The internal rate of return is an interest rate at which Net present value (NPV) is equal to zero, whereas MIRR is the rate of return at which NPV of terminal cash inflows is equal to the outflows (i.e. investment). MIRR can be calculated manually as well as with the help of an online calculator such as modified internal rate of return calculator by iCalculator; the method to use the calculator is explained below.
There are basically three variables that you should take into consideration for the calculation of MIRR:
You can calculate MIRR by using the following formula:
On the basis of the above inputs, the calculator will provide you with MIRR ratio for your project.
The MIRR calculator is an online tool designed by iCalculator in a way that allows you to calculate the MIRR ratio at the comfort of your home or office.
You can calculate MIRR manually and even using the spreadsheets but the process is quite complicated. Using the calculator is really easy and saves you effort and time. Additionally, the calculator allows you to enter a huge number of cash flow periods. This can be very useful in evaluating big projects. Let's find out how evaluation the projects by MIRR method can be useful.
The MIRR ratio of assessing the profitability of your projects can be a really useful tool in various ways, because:
Even though the MIRR calculations are quite useful, let's take a look at some of the drawbacks of this method.
Though MIRR is a better financial tool, for calculating the attractiveness of an investment, it also has certain limitations:
The MIRR is used for capital budgeting, to understand whether an investment would be viable or not. If the MIRR of a project is higher than the returns expected from it, the investment will be considered attractive. On the other hand, if the MIRR is less than the return expected, it is better not to undertake that project.
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