Explain modified internal rate of return.
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29-09-2020 - |
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Explain modified internal rate of return.
Modified internal rate of return (MIRR) is the adjusted rate of return to eliminate difference between investment rate and return. MIRR sorted out some issues in internal rate of return (IRR). MIRR tells about viability of the project. If the result is more than expected return, then the projects will be considered. MIRR is more accurate than IRR.
Formula
$$MIRR =\sqrt[n]{\frac{FVc}{PVc}}-1$$
Here,FVc= future value of cash flow,PVc= present value of cash flow and n = No. Of periods.
FVc Is positive cash flow that is discounted at reinvestment rate.
PVc Is negative cash flow that is discounted at financing rate.
Advantages of modified internal rate of return are −
- One solution (unlike in IRR, it has two solutions).
- Investment sensitivity is measured.
Disadvantages of modified internal rate of return are −
- Not easy to understand.
- In some cases, decision making is difficult or up to mark.
