Financial modelling terms explained

Modified Internal Rate of Return

Modified internal rate of return (MIRR) is a finance term used in capital budgeting and the valuation of loans, to calculate the interest rates at which a series of cash flows will achieve a certain level of net present value.

What Is MIRR?

The Modified Internal Rate of Return (MIRR) is a financial metric used to calculate the profitability of an investment. It takes into account both the initial investment and the cash flows resulting from that investment, including both positive and negative cash flows. The MIRR is a modified version of the Internal Rate of Return (IRR), which does not take into account the time value of money.

What Is IRR?

The Internal Rate of Return (IRR) is a measure of the profitability of an investment. It is the rate of return that makes the net present value of all cash flows from the investment equal to zero. In other words, it is the rate at which the investment's cash flows are discounted back to the present to equal the initial investment.

How Do You Calculate MIRR?

The Modified Internal Rate of Return (MIRR) is a financial metric that is used to calculate the profitability of an investment. The MIRR takes into account the time value of money, and is used to compare different investment proposals. The MIRR is calculated by finding the rate of return that makes the net present value of the cash flows from the investment proposal equal to zero.

How Do You Calculate IRR?

The Internal Rate of Return (IRR) is a measure of the rate of return on an investment. It is the discount rate at which the net present value (NPV) of all cash flows from the investment is zero. In other words, it is the rate of return that makes the present value of the cash flows from the investment equal to the initial investment.

The IRR can be calculated using a financial calculator or a spreadsheet. To calculate the IRR manually, you need to know the cash flows for the investment and the initial investment. The cash flows can be positive or negative, and they can be in any order.

The first step is to calculate the present value (PV) of each cash flow. To do this, you need to know the discount rate. The discount rate is the rate of return that you would earn on a risk-free investment, such as a government bond.

Next, you need to create a table that lists the cash flows, the PV of each cash flow, and the sum of the PV of all the cash flows.

Cash Flow PV at Discount Rate Sum of PV

-100 0 -100

100 10 90

-200 -20 -200

0 0 0

The final step is to find the IRR. This is done by solving the equation: NPV = 0.

The IRR is the solution to this equation.

What's the Difference Between MIRR and IRR?

The internal rate of return (IRR) is a measure of the rate of return on an investment. It is the discount rate that makes the net present value of all cash flows from the investment equal to zero. The modified internal rate of return (MIRR) is a measure of the rate of return on an investment that takes into account the cost of financing the investment. The MIRR is the discount rate that makes the net present value of all cash flows from the investment, including the cost of financing, equal to zero.

When Would You Use MIRR Instead of IRR?

The Modified Internal Rate of Return (MIRR) is an alternative to the Internal Rate of Return (IRR) that takes into account the timing of cash flows. The IRR assumes that all cash flows are reinvested at the same rate, which may not be accurate for projects with unequal cash flow streams. The MIRR adjusts for this by using a weighted average of the reinvestment rates. The MIRR can be more accurate than the IRR when comparing projects with different cash flow streams.

When Would You Use IRR Instead of MIRR?

There are a few occasions when you might use IRR rather than MIRR. One instance is when you have a series of investments or withdrawals that are not uniform. This might occur, for example, when you have a series of investments at different times or different interest rates. In this case, MIRR could give inaccurate results, since it assumes that all cash flows are reinvested at the same rate. IRR takes into account the different interest rates of the investments and withdrawals and calculates a rate that would make the net present value of all cash flows equal to zero.

Another time you might prefer to use IRR rather than MIRR is when you have a series of negative cash flows. MIRR can't handle negative cash flows and will give inaccurate results in this case. IRR, on the other hand, will calculate a rate that makes the net present value of all cash flows positive.

Ultimately, whether you use IRR or MIRR depends on the specific situation and the type of cash flows involved. In most cases, MIRR will give more accurate results, but it's worth checking IRR as well in case it produces a more favorable outcome.

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