REINVESTMENT RATE ASSUMPTIONS
MODIFIED INTERNAL RATE OF RETURN, MIRR
Finding the MIRR for Projects S and L
Terminal Value (TV) =
The IRR approach assumes that cash flows can be reinvested at the IRR, but it is more realistic to asssume that cash
flows only can be reinvested at the cost of capital. For this reason, NPV is a better decision criterion than IRR.
The modified internal rate of return is the discount rate that causes a project's cost (or cash outflows) to equal the
present value of the project's terminal value.
The terminal value is defined as the sum of the future values of the
project's cash inflows, compounded at the project's cost of capital.
To find MIRR, calculate the PV of the outflows
and the FV of the inflows, and then find the rate that equates the two.
Alternatively, you can solve using Excel's
One advantage of using the MIRR, relative to the IRR, is that the MIRR assumes that cash flows received are