how to find mirr on financial calculator

Daniel Parker

3 min read

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18-01-2025

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The modified internal rate of return (MIRR) is a financial metric used to evaluate the attractiveness of a project or investment. Unlike the traditional internal rate of return (IRR), MIRR addresses some limitations of IRR by assuming reinvestment of intermediate cash flows at a more realistic rate, often the cost of capital. This article will guide you through calculating MIRR using a financial calculator.

Understanding MIRR

Before diving into the calculation, let's quickly recap what MIRR represents. It's a more refined measure of profitability than IRR because it considers the cost of financing and the opportunity cost of reinvesting cash flows. IRR often assumes reinvestment at the IRR itself, which may be unrealistic, especially for projects with varying cash flows. MIRR, on the other hand, typically uses a reinvestment rate that reflects the company's cost of capital or a more conservative rate.

Calculating MIRR on a Financial Calculator: A Step-by-Step Guide

The process involves several steps, but with practice, it becomes straightforward. Most financial calculators don't have a dedicated MIRR function. Instead, we need to use the calculator's cash flow functions in combination with the present value (PV) and future value (FV) functions. Here's how:

Step 1: Inputting Cash Flows

First, you need to input the project's cash flows into your calculator. This involves entering each cash flow (including the initial investment as a negative value) one by one. Most financial calculators have a dedicated cash flow register (often denoted as CFj).

Step 2: Determining the Reinvestment Rate

Choose a reinvestment rate. This rate is crucial for calculating MIRR accurately. A common choice is the company's cost of capital or a risk-free rate.

Step 3: Calculating the Future Value of Positive Cash Flows

Using the future value (FV) function on your calculator, determine the future value of all positive cash flows at the chosen reinvestment rate. This calculation essentially brings all future inflows to a common future point in time.

Step 4: Calculating the Present Value of the Initial Investment

This is typically straightforward – the initial investment is already given in the problem as a negative value.

Step 5: Using the IRR Function with Modified Cash Flows

Now, the final calculation is performed by inputting modified cash flows into the IRR function of your calculator. You will input the following:

• CF0: The present value of the initial investment (from step 4). Remember, this should be negative.
• CF1 through CFn: A single cash flow equal to the future value of all positive cash flows (from step 3). This is placed in the final period of the investment.

Step 6: Finding the MIRR

By running the IRR function on this adjusted cash flow series, your calculator will give you the MIRR. This is the modified internal rate of return of the project.

Example

Let's illustrate this with a simple example. Suppose a project has the following cash flows:

• Year 0: -$10,000 (initial investment)
• Year 1: $3,000
• Year 2: $4,000
• Year 3: $6,000

And we choose a reinvestment rate of 10%.

1. Input Cash Flows: Enter these values into your calculator's cash flow register.
2. Future Value of Positive Cash Flows: Calculate the future value of $3000, $4000, and $6000 at a 10% reinvestment rate. This would be $3000(1.1)^2 + $4000(1.1)^1 + $6000 = $13,930.
3. Present Value of Initial Investment: Remains -$10,000.
4. IRR Calculation: Input the following modified cash flows into your calculator’s IRR function: CF0 = -$10,000; CF3 = $13,930.
5. MIRR: The resulting value (from the IRR function) is the MIRR.

Note: The exact steps may vary slightly based on the specific financial calculator model you're using. Refer to your calculator's manual for detailed instructions.

Conclusion

Calculating MIRR on a financial calculator requires a multi-step approach. By carefully following the steps outlined above and understanding the underlying financial principles, you can accurately determine the modified internal rate of return for any investment opportunity. Remember to always consult your calculator's manual for specific instructions tailored to your model. This detailed method ensures a more realistic and reliable assessment of investment profitability than simply using IRR alone.