MIRR Step-by-Step
Prepared by Pamela Peterson Drake, James Madison University
The modified internal rate of return (MIRR) is the return on an investment, considering not only the
cash flows of the investment, but the earnings on these cash flows based on a specific reinvestment
rate. Assuming that the project’s cost of capital is 10% and the reinvestment rate is 8%, calculate the
MIRR for the following series of cash flows:
0
1
2
3
4
|
|
|
|
|
|
|
|
|
|
-$100,000
$20,000
-$10,000
$80,000
$50,000
For comparison, the internal rate of return for
this project is 11.48% and the net present value,
at a project cost of capital of 10%, is $4,173.21.
Using Excel
If the data is:
1
2
3
4
5
6
A
B
Year
0
1
2
3
4
Cash flow
-$100,000
$20,000
-$10,000
$80,000
$50,000
The NPV is =NPV(0.1,B3:B6)+B2
The IRR is =IRR(B2:B6)
STEP 1:
CALCULATE THE PRESENT VALUE OF THE OUTFLOWS, DISCOUNTED AT THE
PROJECT’S COST OF CAPITAL
0
1
2
3
4
|
|
|
|
|
|
|
|
|
|
$20,000
-$10,000

10 000
(1 0 10)2
$80,000
$50,000
-$100,000
-$8,264.46
-$108,264.46
Using a financial
calculator
FV = 10000
i=8
N=2
Solve for FV
STEP 2:
CALCULATE THE FUTURE VALUE OF THE INFLOWS, COMPOUNDED AT THE
REINVESTMENT RATE, 8%:
0
1
2
3
4
|
|
|
|
|
|
|
|
|
|
$20,000
-$10,000
$80,000

$80,000 (1 + 0.08)
-$100,000

$20,000 (1 + 0.08)3
$50,000.00
86,400.00
25,194.24
$161,594.24
Using a financial calculator
PV = 20000
i=8
N=3
Solve for FV
STEP 3:
PV = 80000
i=8
N=1
Solve for FV
CALCULATE THE RETURN ON THE INVESTMENT
0
1
2
3
4
|
|
|
|
|
|
|
|
|
|
-$108,264.46
$161,594.24
PV = -108264.46
FV = 161594.24
N=4
Solve for i
i = 10.53%
Using Excel
If the data is:
STEP 4:
MAKE A DECISION
Because the MIRR of 10.53% is greater than the
project’s cost of capital of 10% the project is
acceptable.
1
2
3
4
5
6
A
B
Year
0
1
2
3
4
Cash flow
-$100,000
$20,000
-$10,000
$80,000
$50,000
The MIRR is =MIRR(B2:B6,0.1,0.08)
QUESTIONS
1. If the reinvestment rate were 5% instead of 8%, is the project still acceptable?
2. If the reinvestment rate were 6% instead of 8%, is the project still acceptable?
SOLUTIONS
1. If the reinvestment rate is 5%, the project is not acceptable. Its MIRR is 9.76%, which is less than the
project’s cost of capital.
2. If the reinvestment rate is 7%, the project is acceptable. Its MIRR is 10.27% which is more than the
project’s cost of capital.