MODIFIED IRR

(MIRR)

INTRODUCTION-MIRR
Many executives prefer IRR because it is a percentage measure. Regular IRR suffers from many limitations. It is better to modify IRR to overcome those limitations. This new measure is called MIRR.

DEFINITION OF MIRR
MODIFIED IRR can be defined as PV COSTS = PV TERMINAL VALUE
n

COF/(1+k)t=nCIF(1+k)n-t/(1+MIRR)n
t=0

t=0

PV COSTS = TV/(1+MIRR)n

PROCEDURE-MIRR
1.

Calculate the PVC associated with the project, using cost of capital as discount rate.
n t=0

PVC= Cot/(1+k)t
2.

Calculate the TV of the cash inflows expected from the project.

t=0

TV = ncash inflow(1+k)n-t

PROCEDURE-MIRR
3.

Obtain MIRR by solving the following equation

PVC=TV/(1+MIRR)n

ADVANTAGES OF MIRR
MIRR assumes that cash flows are reinvested at the cost of capital. MIRR is a better indicator of true profitability. Solves the problem of Multiple IRR Consistent with the decision based on NPV.

MIRR IN CASE OF MUTUALLY EXCLUSIVE PROJECTS



Same result -If two projects are of equal size and life. Same result- If projects are equal in size, but have different life. Conflict Projects differ in size