Modified internal rate of return
A general MIRR calculation discounts negative cash flows to time zero at a financing rate and compounds positive cash flows to the end of the project at a reinvestment rate. MIRR = (terminal value of positive flows / present value of negative flows)^(1/n) − 1. Use absolute outflow value in the denominator and the correct project length. It avoids multiple-IRR ambiguity for the modelled cash flows and makes rate assumptions explicit. It remains a percentage measure and does not automatically replace NPV for ranking mutually exclusive projects of different scale.
Worked example
A project costs $100 now and pays $60 at each of years 1 and 2. At a 10% reinvestment rate, terminal value is $60 × 1.10 + $60 = $126. MIRR = (126/100)^(1/2) − 1 = approximately 12.25%.
Common mistake
Compounding all inflows for the full project life regardless of when received, or assuming the highest MIRR always creates the most absolute value.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |