MIRR (Modified Internal Rate of Return)
A version of IRR that reinvests positive cash flows at a stated rate and discounts negative ones at a stated finance rate, avoiding IRR’s unrealistic reinvestment assumption and its multiple-answer problem.
MIRR compounds a project’s positive cash flows forward to the end of the project at a reinvestment rate, discounts any negative cash flows back to today at a finance rate, and finds the single annualized return that connects the two. Unlike IRR it always has exactly one answer.
MIRR is usually lower than IRR for a project with a high IRR, because it assumes cash is reinvested at a more modest rate, such as the company’s cost of capital, rather than at the project’s own high return.
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