

Help Modified Internal Rate of Return (MIRR) The modified internal rate of return (MIRR) is used to rank property investments of equal size. MIRR is a modification of the internal rate of return (IRR) and addresses the problems with IRR which are: Reinvestment Decisions Ambiguity For the first project the IRR is 11.11% and for the second project it is 10.69%. However, for both projects the MIRR is the same at 10.69%. The formula for MIRR is: where: n = power of the root PV = present value or present discounted value (and not NPV ) i = cost of capital If we use the figures above then the MIRR formula for either project will contain the following values: where: power (n) of the root = 3 years PV = $1,020 outlay = $1,000 cost of capital (i) = 10% The answer for either project is 10.69%. Note that the MIRR here is lower than the IRR value of 11.11 for project 1. For investment properties , a more realistic scenario is when the investment phase stretches over a number of years. This phase can involve the purchase of land, the erection of a building and any subsquent refurbishments or modifications.
An example is when a plot of land with a derelict building is purchased for $700,000 in the first year and then is refurbished for $300,000 in the following year. The expected return on the investment is discounted over the next 3 years. The cost of capital is 10% and the rate of reinvestment is 10%. In order to deal with this scenario we divide it into an investment phase and a return phase. MIRR = 15.66% which is significantly lower than the IRR of 18.81%. As a general rule MIRR values are generally less than IRR figures giving a more conservative estimate of return for investment properties.
