How to Calculate MIRR on a Financial Calculator

Evaluating investment projects is crucial for sound financial decision-making. While Net Present Value (NPV) and Internal Rate of Return (IRR) are widely used, the Modified Internal Rate of Return (MIRR) offers a more nuanced perspective on potential returns. This article guides you through calculating MIRR using a financial calculator.

What is Modified Internal Rate of Return?

The Modified Internal Rate of Return (MIRR) is a financial metric used to evaluate investment profitability. It addresses limitations of the traditional Internal Rate of Return (IRR) by making more realistic assumptions about cash flow reinvestment. MIRR assumes positive cash flows are reinvested at a specific, external rate, often a firm’s cost of capital, rather than at the project’s own internal rate of return. This distinction provides a more accurate picture of a project’s true profitability.

Unlike IRR, which can sometimes yield multiple solutions for projects with irregular cash flows, MIRR consistently provides a single, unambiguous result. This makes MIRR a more reliable tool for comparing different investment opportunities, especially when cash flows are complex. The MIRR accounts for both the financing cost of negative cash flows and the reinvestment rate of positive cash flows, offering a comprehensive assessment.

Preparing Your Data for MIRR Calculation

Before calculating MIRR, gathering and organizing your project’s financial data is important. This preparatory step ensures accuracy and efficiency. Three primary data points are necessary: cash flows, the financing rate, and the reinvestment rate.

Cash flows represent the money moving into and out of an investment project over its lifespan. Identify all initial outlays (typically negative) and subsequent inflows and outflows. For example, purchasing equipment is an outflow, while revenue generated is an inflow. Cash flows must be organized chronologically, with the initial investment at time zero, and subsequent cash flows occurring at specific intervals, such as annually. Outflows (money spent) are entered as negative numbers, and inflows (money received) are entered as positive numbers.

The financing rate represents the cost of borrowing funds for the project or the discount rate applied to negative cash flows. This rate reflects the actual cost of capital or the interest rate at which funds can be secured to cover initial investments or any future cash deficits. For instance, if a company borrows money to fund a project, the interest rate on that loan would serve as the financing rate. Identifying this rate accurately is important because it directly impacts the present value of all cash outflows.

The reinvestment rate is the rate at which positive cash flows generated by the project are assumed to be reinvested. This rate should reflect a realistic return an investor can expect from redeploying these funds elsewhere, such as the company’s cost of capital or the average return on other available investments. For example, if a project generates surplus cash, this rate indicates what return that cash can earn when put to use in another venture or financial instrument. Selecting a realistic reinvestment rate is a key aspect that distinguishes MIRR from traditional IRR, which often assumes reinvestment at the project’s own rate.

Step-by-Step MIRR Calculation on Financial Calculators

Calculating the Modified Internal Rate of Return (MIRR) on a financial calculator involves a sequence of steps to input your prepared data. While the specific button presses vary between models, the general approach involves clearing previous data, entering the series of cash flows, specifying the financing rate, and then the reinvestment rate before computing the MIRR.

Texas Instruments BA II Plus

Clear prior cash flow data by pressing CF, then 2nd, and CLR WORK. Input the initial investment (CF0) as a negative number and press ENTER, then the down arrow. For subsequent cash flows (CF1, CF2, etc.), enter the value and press ENTER, followed by the down arrow. If a cash flow repeats for multiple periods, you can enter its frequency (Nj) after inputting the cash flow value by pressing Nj and the number of repetitions, then ENTER.

Once all cash flows are entered, press the IRR key. On the BA II Plus, you will typically find the MIRR function within the IRR menu or accessed through a specific sequence. You will then be prompted to enter the Finance Rate (often denoted as CFO or F). Enter your identified financing rate as a percentage and press ENTER. Next, enter the Reinvestment Rate (often denoted as R or Reinvest) as a percentage and press ENTER. Finally, press CPT to compute and display the MIRR result.

HP 12c

Calculating MIRR on the HP 12c requires a slightly different approach as it does not have a direct MIRR function. Instead, you need to calculate the present value of negative cash flows and the future value of positive cash flows separately. First, clear the calculator by pressing f and then CLR FIN. Input your initial investment (CF0) as a negative number and press g then CF0. For subsequent cash flows, enter the value and press g then CFj. If a cash flow repeats, enter the number of repetitions and press g then Nj.

To proceed with the MIRR calculation on the HP 12c, you will typically need to perform intermediate steps to consolidate cash flows. This involves calculating the present value of all negative cash flows discounted at the financing rate, and the future value of all positive cash flows compounded at the reinvestment rate. Once these two consolidated values are obtained (a single present value of outflows and a single future value of inflows), you can then use the time value of money (TVM) functions to solve for the rate that equates these two amounts over the project’s life. This final calculated rate represents the MIRR.

Understanding Your MIRR Output

Once you have calculated the Modified Internal Rate of Return (MIRR), interpreting the result is important for making informed investment decisions. The MIRR provides a percentage representing the project’s expected annual return, taking into account realistic reinvestment and financing assumptions. This single percentage offers a clear benchmark for evaluating a project’s attractiveness.

The general decision rule for MIRR is straightforward: if the calculated MIRR is greater than your predetermined hurdle rate or cost of capital, the project is typically considered acceptable. A hurdle rate represents the minimum acceptable rate of return for an investment, often reflecting the company’s cost of financing or its required rate of return. Conversely, if the MIRR is less than the hurdle rate, the project should generally be rejected as it is not expected to generate sufficient returns.

MIRR is also a useful tool for comparing multiple investment projects, particularly when they have different scales or cash flow patterns. When evaluating mutually exclusive projects, the project with the highest MIRR is usually the preferred choice, assuming all other factors are equal and the MIRR exceeds the hurdle rate. This allows for a direct comparison of profitability under more realistic conditions.

It is important to remember that MIRR is one of several financial metrics and should not be used in isolation. While MIRR offers advantages over traditional IRR, it is still beneficial to consider it alongside other valuation methods, such as Net Present Value (NPV). Using a combination of metrics provides a more comprehensive understanding of a project’s financial viability and its potential impact on overall financial goals.