## Modified Internal Rate of Return (MIRR)

The conventional IRR has several limitations (unrealistic reinvestment assumption, possible multiple IRRs, conflicts with NPV). MIRR is designed to fix these. It is also called the Terminal Value method.

### How MIRR works

1. Take all cash flows except the initial investment.

2. Compound them forward to the terminal year using an appropriate rate — usually the cost of capital. This produces a single terminal value (one cash inflow in the final year).

3. Treat the project as a single outflow in year 0 and a single inflow (the terminal value) in the terminal year.

4. The discount rate that equates the present value of the terminal inflow to the year-0 outflow is the MIRR.

### What MIRR fixes

Eliminates multiple IRRs — only one rate results.
Corrects the reinvestment assumption — interim flows are reinvested at the cost of capital, not the IRR.
Produces results consistent with NPV.

### Decision rule

Same as IRR:

Accept if MIRR > required rate of return.
Reject if MIRR < required rate of return.

⚠️ Common exam mistakes

Compounding interim cash flows at the IRR instead of the cost of capital — MIRR's whole point is reinvestment at the cost of capital.
Including the initial investment among the cash flows that are compounded to terminal value — only post-year-0 flows are compounded.
Forgetting that MIRR gives a single rate (one of its advantages over IRR), then expecting multiple values.

Reference:

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Modified Internal Rate of Return (MIRR) / Terminal Value Method

⚠️ Common exam mistakes