MIRR Formula

MIRR Formula

IRR use the same rate for reinvestment of fund, which is not practical. Therefore MIRR concept has been introduced, which uses the cost of capital as reinvestment.

MIRR = n√A/B

n= life of project

A= Recovery phase Cash flows

B= Investment phase Cash flow

Example

Year               Cash Flows

0                          (100,000)

1                            (20,000)

2                             50,000

3                             50,000

4                             40,000

5                            (20,000)

IRR is 12% and discount Rate is 8%, Calculate MIRR?

Solution

Investment Phase discounting

Year       Cash Flows      Discount              PV

0               (100,000)          1                      (100,000)

1                (20,000)          (1.08)^-1                   (18,518)

Total                                                           118,518

Recovery Phase flows

Year     Cash Flows       Discount         PV

2                  50,000          (1.08)³           62986

3                  50,000          (1.08)²           58320

4                  40,000           (1.08)¹          43200

5                  (20,000)          1                (20000)

                                                               144,506

MIRR = n√A/B -1

= 5√144,506/118518

=4.04%