Modified Internal Rate of Return (MIRR)

The Modified Internal Rate of Return (MIRR) is a financial metric used to evaluate the profitability of an investment. It is a variation of the internal rate of return (IRR), which is the discount rate that makes the net present value (NPV) of an investment equal to zero.

The MIRR is calculated by taking the NPV of an investment's cash flows, discounting them at the project's cost of capital, and then re-discounting them at the terminal value (TV) of the investment. The TV is the present value of all future cash flows from the investment, assuming that they are reinvested at the project's cost of capital.

The MIRR is a more accurate measure of an investment's profitability than the IRR because it takes into account the time value of money and the reinvestment of cash flows. The IRR does not take into account the time value of money, and it assumes that all cash flows are reinvested at the IRR. This can lead to an inaccurate assessment of an investment's profitability.

The MIRR is also more robust to changes in the discount rate than the IRR. The IRR is very sensitive to changes in the discount rate, and even small changes can significantly affect the IRR. The MIRR is less sensitive to changes in the discount rate, and it is therefore a more reliable measure of an investment's profitability.

The MIRR is a useful tool for evaluating the profitability of an investment. It is a more accurate and robust measure of an investment's profitability than the IRR. However, the MIRR is more complex to calculate than the IRR, and it may not be appropriate for all investments.

Here are some additional points to consider when using the MIRR:

• The MIRR is a relative measure of profitability, and it does not take into account the risk of an investment.
• The MIRR is only applicable to investments with multiple cash flows.
• The MIRR can be negative, even if an investment has a positive NPV.

The MIRR is a valuable tool for evaluating the profitability of an investment. However, it is important to understand its limitations before using it.