Modified internal rate of return

In this lesson

1. 0:00 Further aspects of project appraisal overview
2. 2:30 Standard IRR: concept and calculation method
3. 4:03 Limitations of standard internal rate of return
4. 6:14 Modified IRR: overcoming standard IRR limitations
5. 7:11 Modified IRR formula and components explained
6. 10:00 Modified IRR worked example calculation
7. 14:03 Modified IRR merits and practical advantages
8. 15:31 Modified IRR drawbacks and NPV conflicts

About this lesson

You'll discover why MIRR overcomes two key limitations of standard IRR: its unrealistic assumption that reinvested cash flows earn the project's own return rate, and its potential to produce zero or multiple rates of return that make decision-making impossible. The lesson starts by recapping standard IRR calculation using linear interpolation, then explains how MIRR assumes reinvested cash inflows earn the company's cost of capital instead—a far more realistic rate. You'll work through the MIRR formula step-by-step, learning how to calculate the terminal value of inflows and present value of outflows, then convert the overall return into an annual percentage using the nth root method. A detailed worked example shows you how to apply this to a four-year project with multiple cash flows. You'll also explore when to use MIRR and its trade-offs. While MIRR is easy to understand as a percentage and considers the time value of money, it has drawbacks: as a relative measure, it ignores project size and can sometimes conflict with net present value (which should take priority). The lesson also notes that MIRR can still be misleading if a company's cost of capital is unrealistically high for reinvestment assumptions. This topic appears in Performance Management and Advanced Performance Management papers, where project appraisal techniques are core to investment decision-making.

Duration: 18m