1. What is the MIRR Equation?

The MIRR (Modified Internal Rate of Return) is a financial metric that estimates the profitability of potential investments. It addresses some limitations of the traditional IRR by assuming reinvestment at the firm's cost of capital rather than the IRR itself.

2. How Does the Calculator Work?

The calculator uses the MIRR equation:

Where:

• \( FV \) — Future value of cash flows
• \( PV \) — Present value of cash outflows
• \( n \) — Number of periods

Explanation: The equation calculates the annualized effective compounded return rate by considering both the cost of investment and the interest received on reinvestment of cash.

3. Importance of MIRR Calculation

Details: MIRR provides a more realistic measure of an investment's attractiveness than standard IRR, especially for projects with multiple cash flows and varying reinvestment rates.

4. Using the Calculator

Tips: Enter future value and present value in dollars, and number of periods. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How is MIRR different from IRR?
A: MIRR assumes reinvestment at the firm's cost of capital, while IRR assumes reinvestment at the IRR itself, which may not be realistic.

Q2: What is a good MIRR value?
A: A MIRR higher than the company's required rate of return or cost of capital is generally considered good, indicating a profitable investment.

Q3: Can MIRR be negative?
A: Yes, MIRR can be negative if the present value of outflows exceeds the future value of inflows, indicating a loss-making investment.

Q4: What are the limitations of MIRR?
A: MIRR still relies on estimated future cash flows and assumed reinvestment rates, which may not materialize as expected.

Q5: When should I use MIRR instead of NPV?
A: MIRR is useful when comparing projects of different sizes and durations, while NPV provides the absolute dollar value of an investment's worth.