Modified Rate of Return Calculator

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Modified Rate of Return Calculator

Results:

Nominal Rate of Return:

Real Rate of Return:

Understanding the Modified Rate of Return

The Modified Rate of Return, often referred to as 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), the MIRR addresses some of its limitations by assuming that positive cash flows are reinvested at a specified rate, while any financing costs (negative cash flows) are borrowed at a specified rate.

This calculator helps you compute two key figures related to your investment's performance:

  • Nominal Rate of Return: This is the stated rate of return on an investment before accounting for inflation. It simply reflects the growth of your investment in absolute monetary terms.
  • Real Rate of Return: This metric adjusts the nominal rate of return to account for the erosion of purchasing power due to inflation. It gives you a more accurate picture of your investment's actual growth in terms of what it can buy.

How it Works

The calculation involves several steps:

  1. Calculate the Final Value of Positive Cash Flows: All positive cash flows are compounded to the end of the investment period using a specified reinvestment rate (though for this simplified calculator, we are focusing on a single final value for all positive cash flows to derive a nominal return).
  2. Calculate the Present Value of Negative Cash Flows: All negative cash flows (costs) are discounted back to the present using a specified financing rate.
  3. Determine the Net Future Value: This is the difference between the compounded value of positive cash flows and the discounted value of negative cash flows.
  4. Calculate the MIRR: The MIRR is the discount rate that equates the present value of the negative cash flows to the future value of the positive cash flows. For this simplified calculator, we are calculating the nominal rate of return from the initial investment to the final value, and then adjusting it for inflation to find the real rate of return.

Formulae Used in This Calculator:

Nominal Rate of Return (NRR)

NRR = ( (Final Value / Initial Investment) ^ (1 / Duration Years) ) – 1

This formula calculates the annualized growth rate of your investment.

Real Rate of Return (RRR)

RRR = ( (1 + NRR) / (1 + Inflation Rate) ) – 1

This formula adjusts the nominal rate of return for the effects of inflation.

Example:

Let's say you make an Initial Investment of $10,000. Over a Duration of 5 Years, your investment grows to a Final Value of $15,000. The average Annual Inflation Rate during this period was 3%.

  • Nominal Rate of Return: ((15000 / 10000) ^ (1 / 5)) – 1 = (1.5 ^ 0.2) – 1 ≈ 1.08447 – 1 = 0.08447 or 8.45%
  • Real Rate of Return: ((1 + 0.08447) / (1 + 0.03)) – 1 = (1.08447 / 1.03) – 1 ≈ 1.05288 – 1 = 0.05288 or 5.29%

This means your investment grew by approximately 8.45% per year in nominal terms, but in real terms, after accounting for inflation, your purchasing power increased by about 5.29% per year.

function calculateModifiedRateOfReturn() { var initialInvestment = parseFloat(document.getElementById("initialInvestment").value); var finalValue = parseFloat(document.getElementById("finalValue").value); var durationYears = parseFloat(document.getElementById("durationYears").value); var annualInflationRate = parseFloat(document.getElementById("annualInflationRate").value) / 100; // Convert percentage to decimal var nominalRateOfReturn = 0; var realRateOfReturn = 0; if (isNaN(initialInvestment) || isNaN(finalValue) || isNaN(durationYears) || isNaN(annualInflationRate) || initialInvestment <= 0 || finalValue <= 0 || durationYears <= 0) { document.getElementById("result").innerHTML = "

Results:

Please enter valid positive numbers for all fields."; return; } // Calculate Nominal Rate of Return nominalRateOfReturn = Math.pow((finalValue / initialInvestment), (1 / durationYears)) – 1; // Calculate Real Rate of Return realRateOfReturn = ((1 + nominalRateOfReturn) / (1 + annualInflationRate)) – 1; document.getElementById("nominalRateOfReturn").innerHTML = (nominalRateOfReturn * 100).toFixed(2) + "%"; document.getElementById("realRateOfReturn").innerHTML = (realRateOfReturn * 100).toFixed(2) + "%"; document.getElementById("result").innerHTML = "

Results:

" + "Nominal Rate of Return: " + (nominalRateOfReturn * 100).toFixed(2) + "%" + "Real Rate of Return: " + (realRateOfReturn * 100).toFixed(2) + "%"; }

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