How to Calculate Modified Internal Rate of Return in Excel

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Modified Internal Rate of Return (MIRR) Calculator

#mirr-calculator { font-family: sans-serif; max-width: 500px; margin: 20px auto; padding: 20px; border: 1px solid #ccc; border-radius: 8px; } .form-group { margin-bottom: 15px; } .form-group label { display: block; margin-bottom: 5px; font-weight: bold; } .form-group input[type="number"], .form-group input[type="text"] { width: 100%; padding: 8px; border: 1px solid #ccc; border-radius: 4px; box-sizing: border-box; } button { background-color: #4CAF50; color: white; padding: 10px 15px; border: none; border-radius: 4px; cursor: pointer; font-size: 16px; } button:hover { background-color: #45a049; } #result { margin-top: 20px; font-weight: bold; color: #333; } function calculateMIRR() { var initialInvestment = parseFloat(document.getElementById("initialInvestment").value); var cashFlowsText = document.getElementById("cashFlows").value; var reinvestmentRate = parseFloat(document.getElementById("reinvestmentRate").value); var resultDiv = document.getElementById("result"); resultDiv.innerHTML = ""; // Clear previous results if (isNaN(initialInvestment) || isNaN(reinvestmentRate)) { resultDiv.innerHTML = "Please enter valid numbers for Initial Investment and Reinvestment Rate."; return; } var cashFlowsArray = cashFlowsText.split(',').map(function(item) { return parseFloat(item.trim()); }); for (var i = 0; i < cashFlowsArray.length; i++) { if (isNaN(cashFlowsArray[i])) { resultDiv.innerHTML = "Please enter valid comma-separated numbers for Cash Flows."; return; } } var positiveCashFlowsSum = 0; var numPeriods = cashFlowsArray.length; for (var i = 0; i 0) { positiveCashFlowsSum += cashFlowsArray[i] * Math.pow(1 + reinvestmentRate, numPeriods – 1 – i); } } var presentValueFinancing = initialInvestment; for (var i = 0; i < cashFlowsArray.length; i++) { if (cashFlowsArray[i] < 0) { presentValueFinancing += cashFlowsArray[i] / Math.pow(1 + reinvestmentRate, i + 1); } } // Formula for MIRR: (FV / PV)^(1/n) – 1 // FV is the future value of positive cash flows // PV is the present value of negative cash flows (including initial investment) // n is the number of periods if (presentValueFinancing <= 0) { resultDiv.innerHTML = "Cannot calculate MIRR: Present value of financing is zero or negative."; return; } var mirr = Math.pow(positiveCashFlowsSum / presentValueFinancing, 1 / numPeriods) – 1; resultDiv.innerHTML = "MIRR: " + (mirr * 100).toFixed(2) + "%"; }

Understanding and Calculating the 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 or project. Unlike the traditional Internal Rate of Return (IRR), MIRR addresses some of its limitations by assuming that positive cash flows are reinvested at a specified rate, and any negative cash flows are financed at a specified financing rate. This provides a more realistic and often more accurate measure of an investment's true return.

Why Use MIRR?

The standard IRR calculation can sometimes produce multiple or no solutions, especially for projects with irregular cash flows. It also implicitly assumes that all positive cash flows are reinvested at the IRR itself, which may not be feasible in practice. MIRR overcomes these issues by:

  • Addressing Multiple IRRs: By using a specific reinvestment and financing rate, MIRR typically yields a single, unambiguous result.
  • Realistic Reinvestment Assumption: It allows you to set a more practical rate (e.g., the company's cost of capital or a safe market rate) at which intermediate positive cash flows can be reinvested.
  • Realistic Financing Assumption: Similarly, it allows you to specify the rate at which any additional funds needed for the project (negative cash flows beyond the initial investment) would be financed.

How MIRR is Calculated

The calculation of MIRR involves several steps:

  1. Calculate the Future Value (FV) of All Positive Cash Flows: Each positive cash flow is compounded forward to the end of the project's life at the specified reinvestment rate.
  2. Calculate the Present Value (PV) of All Negative Cash Flows: Each negative cash flow (including the initial investment) is discounted back to the present at the specified financing rate.
  3. Determine the Number of Periods (n): This is simply the total number of periods over which the cash flows occur.
  4. Calculate MIRR: The MIRR is then found using the formula:

    MIRR = ( (FV of Positive Cash Flows / PV of Negative Cash Flows) ^ (1 / n) ) – 1

In our calculator above, the "Initial Investment" and any subsequent negative cash flows are treated as the financing component (PV of Negative Cash Flows), and the positive cash flows are compounded forward at the "Reinvestment Rate" to find their future value (FV of Positive Cash Flows).

Example Calculation:

Let's consider an investment with the following details:

  • Initial Investment: $50,000
  • Cash Flows: $10,000 (Year 1), $20,000 (Year 2), $30,000 (Year 3), -$5,000 (Year 4)
  • Reinvestment Rate: 12% (0.12)
  • Financing Rate: 8% (0.08) – *Note: Our calculator uses a single reinvestment rate for both, effectively assuming the financing rate equals the reinvestment rate for simplicity in this interactive tool. For a true MIRR with different rates, manual calculation or more advanced tools are needed.*

Using the calculator with these inputs:

  • Initial Investment: 50000
  • Cash Flows: 10000, 20000, 30000, -5000
  • Reinvestment Rate: 0.12

The calculator will compute the MIRR, which provides a single, clear rate of return for this investment scenario.

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