LO6
Appendix A – The Modified Internal
Rate of Return
• The MIRR is used on projects with nonconventional cash flows
• The cash flows are modified first and then
the IRR is calculated using the modified
cash flows
• There are three MIRR methods that are
used:
• The Discounting Approach
• The Reinvestment Approach
• The Combination Approach
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LO6
MIRR Method #1
The Discounting Approach
• All negative cash
flows are discounted
back to the present at
the required return
and added to the
initial cost.
• From the previous
non-conventional
cash flow example,
we had a required
return of 15% and:
Year 0
-$90,000
Year 1
$132,000
Year 2
$100,000
Year 3
-$150,000
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LO6
MIRR Example - Continued
• Using Method #1, the cash flow at year 3
would be discounted back to year 0 at 15%
• The cash flows would look like this:
Year 0: -$90,000 - $150,000/(1.153)
= -$188,627.43
Year 1: $132,000
Year 2: $100,000
Year 3: $0
• MIRR using Method #1 is 15.77%
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LO6
MIRR Method #2
The Reinvestment Approach
• All cash flows (positive and negative) except the
first are compounded out to the end of the
project’s life and then the IRR is calculated
• The cash flows would look like this:
Year 0: -$90,000
Year 1: $0
Year 2: $0
Year 3: $-$150,000 + $100,000(1.15) +
$132,000(1.152)
• MIRR using Method #2 is 15.75%
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LO6
MIRR Method #3
The Combination Approach
• All negative cash flows are discounted back to
the present and all positive cash flows are
compounded out to the end of the project’s life
• The cash flows would look like this:
Year 0: -$90,000 - $150,000/(1.153)
= -$188,627.43
Year 1: $0
Year 2: $0
Year 3: $100,000(1.15) + $132,000(1.152)
= $289,570
• MIRR using Method #2 is 15.36%
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LO6
MIRR vs. IRR
• MIRR can handle non-conventional cash flows,
where as the IRR can’t
• But there are problems with MIRR:
• There are three methods, and three different MIRRs.
Which MIRR is correct? The differences could be
larger on a more complex project
• MIRR is a rate of return on a modified set of cash
flows, not the project’s actual cash flows
• Since the MIRR depends on an externally supplied
discount rate, the result is not truly an “internal” rate of
return
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