MIRR is a capital budgeting tool used to compare the different investments. It is a variation of the Internal Rate of Return (IRR) tool.
IRR assumes that funds from the project reinvest at the project’s rate of return. MIRR assumes that funds from the project reinvest at the firm’s cost of capital (which is often different from the rate of return of a proposed project).
MIRR is calculated using a time value calculation.
What is Present Value?Present Value (PV) is the total value at the beginning of the time period.
What is Future Value?Future Value (FV) is the total value at the end of the time period.
What are periods?Periods are the number of times that compounding (and payments) take place.
What is the rate?The rate is the amount of interest earned per compounding period.
What is Payment (PMT)?A payment is an amount either deposited or withdrawn at each compounding period. A negative number designates an amount that is deposited, while a positive one withdrawn. For example, if $100 is deposited each compounding period, it would be entered as '-100', while if $75 was payed out each compounding period, it would be entered as '75'.
What is Payments at start or end of period?A payment at the beginning of a period would mean that the payment (or deposit) occurs at the beginning of each period. A payment at the end of a period would mean that the payment (or deposit) occurs at the end of each period.
- Wikipedia – Time Value of Money
- Wikipedia – Internal Rate of Return
- Math is Fun – Internal Rate of Return