UK Accounting Glossary
MIRR – modified investment rate of return is a financial tool that is used to determine the attractiveness of an investment. MIRR is used in capital budgeting as a tool to rank investments of equal size.
MIRR: Modified Internal Rate of Return.
The modified internal rate of return (MIRR) is a financial measure of an investment’s attractiveness. It is used in capital budgeting to rank alternative investments of equal size.
MIRR – modified investment rate of return is a financial tool that is used to determine the attractiveness of an investment. MIRR is used in capital budgeting as a tool to rank investments of equal size. MIRR, the modified investment rate of return is the new (IRR) internal rate of return; as a result, it aims to solve the issues with the IRR.
MIRR fixes two key issues with IRR, however, there are others that it still does not address.
Firstly, the IRR has been known to be misapplied. Often, people, will that short term positive cash flows become reinvested at the same rate of return that the project generating them is receiving. Usually, this is an unlikely scenario. Much more likely is that the money will be reinvested at a rate that is much closer to said companies cost of capital. Therefore, the IRR will often give an overly optimistic view of the projects that are under study.
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This glossary post was last updated: 3rd June 2019.