The Modified Internal Rate of Return indicates the profitability of an investment and therefore is commonly used in business, when choosing between investmentments.
This calculation uses a schedule of payments (including an initial investment and a series of net income payments), to calculate the compounded return, assuming the Net Present Value of the investment is zero.
The difference between the Modified Internal Rate of Return (MIRR) and the Internal Rate of Return (IRR) is that the MIRR considers the initial cost of the investment and also the interest received on the reinvestment of cash, whereas the IRR does not.Further information is provided on the Wikipedia MIRR page
The Excel MIRR function returns the Modified Internal Rate of Return for a supplied series of periodic cash flows (i.e. a set of values, which includes an initial investment value and a series of net income values).
The syntax of the function is:
Where the function arguments are as follows:
|values||-||These must contain at least one negative value (representing payment) and at least one positive value (representing income).|
|finance_rate||-||The interest rate paid on the money used in the cash flows.|
|reinvest_rate||-||The interest rate paid on the reinvested cash flows.|
In the spreadsheet below, the cashflow for an investment is shown in cells B2 - B7. The initial investment of $100 is shown in cell B2 and the net income over 5 periods is shown in cells B3-B7.
The MIRR function in cell C2 shows the calculation of the Modified Internal Rate of Return after 4 years and the function in cell C4 shows the Modified Internal Rate of Return after 5 years.
Further information and examples of the Excel Mirr function are provided on the Microsoft Office website.
If you get an error from the Excel Mirr function this is likely to be one of the following:
|#DIV/0!||-||Occurs if the supplied values array does not contain at least one negative and at least one positive value.|
|#VALUE!||-||Occurs if any of the supplied arguments are non-numeric.|