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ModifiedInternalRateofReturn
Modifiedinternalrateofreturn(MIRR)isanimprovedversionoftheinternalrateofreturn(IRR)approachto
capitalbudgetingdecisions.Itdoesnotrequiretheassumptionthattheprojectcashflowsarereinvestedatthe
IRRrather,itfactorsinadiscretereinvestmentrateintothemodel.
Decisionrule:projectswithMIRRgreatertheproject'shurdlerateshouldbeacceptedwhileincaseofmutually
exclusiveprojects,theprojectwithhigherMIRRshouldbepreferred.

Formula
ThereisbuiltinfunctioninMicrosoftExelwhichcanbeusedtocalculatetheMIRR:
MIRR=MIRR(values,finance_rate,reinvest_rate)
Valuesrepresentthearrayoftheproject'scashflows,finance_rateistherelevantcostofcapital,and
reinvest_rateistherateofreturnatwhichtheproject'scashflowsareexpectedtobereinvested.
ThemanualapproachtocalculationofMIRRinvolvesfindingthesumofterminalvaluesofallthenetcashflows
(otherthaninitialinvestment)andthenusingthefollowingequationtosolveforMIRR:

MIRR

n SumofTerminalCashFlows
InitialInvestment

Wherenisthenumberofperiods.

Example
YouareanassistanttoGkhanErdogan,thecorporatefinancedirectoratBTC,aTurkishcivilengineeringfirm.
Twoofthecompany'srecentbidsareaccepted.ThefirstrelatestoconstructionofanewairportinIzmir.The
secondrelatestoconstructionofamotorwayconnectingIzmirwithAnkara,thecapital.Boththeprojectsare
expectedtotake3years.Theapplicablefinancerateis10%andtheproject'scashflowsinTurkishLiraare
givenbelow:

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Year

Airport

Motorway

(12,000,000)

(18,000,000)

6,000,000

8,000,000

8,000,000

10,000,000

4,000,000

10,000,000

Thecompanysubmittedbidsforbothprojectsbecausebothhadpositivenetpresentvalues.
AlevToprak,theCEO,hasaskedGkhantorecommendwhichprojectthecompanyshouldaccept.Alevisafan
oftheIRRapproach.Gokhan,ontheotherhand,isworriedabouttheshortcomingsoftheIRRapproach.He
believesthattheeconomymightslowdownalittleinnextfewyearsandalowerreinvestmentrateshouldbe
factoredin.HeaskedyoutocalculateMIRRforboththeprojects.
Youdoublecheckwheneverandwhereverpossible:soyoudecidedtocalculatetheMIRRusingthemanual
formulaapproachandthenverifytheresultsusingMSExcelMIRRfunction.

Manualapproach
Thefollowingtablecalculatestheequivalentterminalcashflowforbothprojects:

AirportProject
Year

CashFlows

FVFactor

Formula

TerminalValue

(12,000,000)

6,000,000

1.16640

=(1+8%)^(31)

6,998,400

8,000,000

1.08000

=(1+8%)^(32)

8,640,000

4,000,000

1.00000

=(1+8%)^(33)

4,000,000
19,638,400

MotorwayProject
Year

CashFlows

FVFactor

Formula

TerminalValue

(18,000,000)

8,000,000

1.16640

=(1+8%)^(31)

9,331,200

10,000,000

1.08000

=(1+8%)^(32)

10,800,000

10,000,000

1.00000

=(1+8%)^(33)

10,000,000
30,131,200

MIRRAirport

3 19,638,400
12,000,000

17.84%

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MIRRMotorway

3 30,131,200
18,000,000

18.74%

ThemotorwayprojectshouldbepreferredbasedonMIRRapproach.

MicrosoftExcelFunction
MIRRfunctionisusedtocalculateMIRRforbothprojectsasshowninthespreadsheetbelow.Itusesfinance
rateof10%andreinvestmentrateof8%.
WrittenbyObaidullahJan
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6KDUH

Subjects
Accounting
Economics
Finance
Management

RelatedTerms
EquivalentAnnualAnnuity

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