How To Calculate MIRR On Financial Calculator

MIRR Formula:

\[ MIRR = \left( \frac{FV(\text{positive cash flows, finance rate})}{PV(\text{negative cash flows, reinvestment rate})} \right)^{\frac{1}{n}} - 1 \]

Modified Internal Rate of Return (MIRR):

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1. What is MIRR?

The Modified Internal Rate of Return (MIRR) is a financial metric that addresses some limitations of the traditional IRR. It assumes that positive cash flows are reinvested at a reinvestment rate and that negative cash flows are financed at a finance rate, providing a more realistic measure of an investment's profitability.

2. How Does the Calculator Work?

The calculator uses the MIRR formula:

\[ MIRR = \left( \frac{FV(\text{positive cash flows, reinvestment rate})}{PV(\text{negative cash flows, finance rate})} \right)^{\frac{1}{n}} - 1 \]

Where:

\( FV \) — Future value of positive cash flows
\( PV \) — Present value of negative cash flows
\( n \) — Number of periods
Reinvestment Rate — Rate for positive cash flow reinvestment
Finance Rate — Rate for negative cash flow financing

Explanation: MIRR provides a more conservative and realistic measure of return by separating the reinvestment and financing rates.

3. Importance of MIRR Calculation

Details: MIRR is crucial for investment analysis as it eliminates the multiple IRR problem and provides a more accurate reflection of an investment's profitability by using different rates for reinvestment and financing.

4. Using the Calculator

Tips: Enter cash flows as comma-separated values (e.g., -1000,300,400,500), specify finance and reinvestment rates as percentages. Use CFj key for cash flow entry and IRR key for calculation on financial calculators.

5. Frequently Asked Questions (FAQ)

Q1: Why use MIRR instead of IRR?
A: MIRR addresses the unrealistic reinvestment assumption of IRR and eliminates the multiple IRR problem, providing a more accurate measure of investment profitability.

Q2: What are typical finance and reinvestment rates?
A: Finance rate is typically the cost of capital, while reinvestment rate is often the company's expected return on reinvested funds.

Q3: How do I use CFj and IRR keys on a financial calculator?
A: Enter cash flows using CFj key, then use IRR key to calculate. For MIRR, you may need to use specific MIRR functions or calculate manually using the formula.

Q4: What does a positive MIRR indicate?
A: A positive MIRR indicates that the investment is expected to generate returns above the specified rates, making it potentially worthwhile.

Q5: Are there limitations to MIRR?
A: MIRR still relies on estimated rates and may not capture all investment risks, but it provides a more realistic measure than traditional IRR.