The Modified Internal Rate of Return

Using the IRR has been a much-used tool for evaluating potential investments. This is most likely due to the simplicity of using it. Yet, the IRR has some flaws, the most crucial one being that it assumes the cash flows will be reinvested for the life of the project at the rate which equals the IRR. There are some good projects which have IRR considerably higher than it is reasonable to reinvest. It is this reason that has caused some to use a Modified Internal Rate of Return (MIRR). Financial calculators do not have an MIRR key. This means we must apply a bit of ingenuity to obtain this information.

Suppose you were given the opportunity to invest $800. What would the MIRR be your reinvestment rate were 10% per year.

Instructions for the Texas Instrument B A II Plus

• The present values of the cash-flows are the same as given for my blog on (NPV): O/100/200/300/400//500.
• First you must clear the Time Value of Money Keys.2^nd CE/C
• Whenever you wish to check to ensure the old data is cleared enter 1 the N key
• Enter 10 the press the I/Y key
• Enter 100 then press the PV key
• Now press CPT and then FV It should read -$110 If it doesn’t repeat the clearing of TVM keys
• Now press CF then 0 enter and then the down arrow
• 100 then enter and then the down arrow twice
• 200 then enter and then the down arrow twice
• 300 then enter and then the down arrow twice
• 400 then enter and then the down arrow twice
• 500 then enter and then the down arrow twice
• Now press the NPV key and then 10 enter down arrow
• To obtain the present value of the cash-flow press the CPT key. It should read $1,065.2588
• To find the future value of the cash-flow enter 1.065.26
• Enter 5 N
• Enter 10 I/Y
• Then press the CPT key then the FV key
• The answer should be $1,715.61
• The data has told us that our $800.00 investment will yield a lump sum cash-flow 0f $1,715.61 at period 5
• The MIRR is the discount rate that equal these two numbers.
• Enter -800 then press the PV key
• Now press the CPT and the I/Y keys
• The MIRR is 16.48% per year

Therefore, we would accept the offer at $800 because the NPV and IRR are positive, and the IRR and MIRR are more than the 12% we require.

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