What Is a Modified Internal Rate of Return?
In capital investment, because the internal rate of return (IRR) indicator has a mistake in the assumption of the reinvestment rate of return, there may be multiple internal rates of return that are inconsistent with the conclusions of the internal rate of return index and the conclusions of the NPV index.
Modified internal rate of return
Right!
- Chinese name
- Modified internal rate of return
- Foreign name
- modified internal rate of return
- Short name
- MIRR
- Meaning
- Reinvestment yield assumptions become more reasonable
- In capital investment, because the internal rate of return (IRR) indicator has a mistake in the assumption of the reinvestment rate of return, there may be multiple internal rates of return that are inconsistent with the conclusions of the internal rate of return index and the conclusions of the NPV index.
- The revised internal rate of return is to calculate the future cash inflows of investment projects to the final value of the last year at a predetermined discount rate under a certain discount rate, and convert the cash outflows (investment amount) of investment projects A discount rate that achieves the present value and makes the final value of the cash inflow and the cash outflow of the investment project reach a value balance.
- In order to solve the above problems, the internal rate of return indicator can be better used for investment decisions, and a modified (or adjusted) internal rate of return (MIRR) indicator is introduced.
- The present value of the investment cost of the project = the final value of the project's net cash inflow / (1 + MIRR) ^ n
- If all investment cash outflows occurred in the current period and the first cash inflow occurred in the first period, then:
- Project investment cost = final value of project net cash inflow / (1 + MIRR) ^ n
- Compared with the ordinary internal rate of return (IRR), the modified internal rate of return assumes that all investment income is reinvested at the discount rate required by the investment, thereby making its assumptions about the reinvestment rate of return more reasonable, and MIRR It also solves the problem of having multiple IRRs at the same time. However, there is still no way to solve the problem of contradiction with the NPV index due to different investment scales after this revised index.