🔑 Key Takeaways
- IRR assumes you reinvest cash flows at the IRR rate itself — often unrealistically high.
- MIRR (Modified IRR) uses a separate, more realistic reinvestment rate — usually your cost of capital.
- MIRR is typically lower than IRR but gives a more achievable, honest picture of returns.
- Use both: IRR for industry comparisons, MIRR for internal decision-making.
You've calculated an impressive 28% IRR on a project. Time to celebrate? Not so fast. That number assumes every dollar of interim cash flow gets reinvested at 28%—which almost never happens in practice.
That's where MIRR (Modified Internal Rate of Return) comes in. It addresses IRR's biggest flaw by using a more conservative, realistic reinvestment assumption.
📚 Related Reading: Learn how to calculate IRR step-by-step or compare IRR vs NPV.
The Reinvestment Rate Problem
Standard IRR carries a hidden assumption that catches even experienced investors off guard:
⚠️ The IRR Assumption: IRR implicitly assumes that all intermediate cash flows (dividends, rent, partial exits) are reinvested at the IRR rate until the end of the project.
If your project has a 25% IRR, IRR assumes you can reinvest $10,000 received in Year 2 at 25% for the remaining years. Can you really find another 25% opportunity on demand? Probably not.
MIRR vs IRR Comparison Table
| Feature | IRR | MIRR |
|---|---|---|
| Reinvestment Assumption | At the IRR rate itself | At your cost of capital |
| Realism | Often overstated | More conservative/realistic |
| Multiple IRRs Problem | Possible with non-conventional cash flows | Always produces single result |
| Industry Usage | Very common (PE, VC, Real Estate) | Less common but growing |
| Excel Function | =IRR(values) |
=MIRR(values, finance_rate, reinvest_rate)
|
| Typical Result | Higher | Lower but more achievable |
How MIRR Solves the Problem
MIRR separates two key rates:
- Finance Rate: The cost of borrowing (for negative cash flows)
- Reinvestment Rate: What you can realistically earn on positive cash flows (usually your WACC or a risk-free rate)
📐 The MIRR Formula
MIRR = (FV of positive cash flows / PV of negative cash flows)1/n − 1
- FV = Future Value of all positive cash flows, compounded at the reinvestment rate
- PV = Present Value of all negative cash flows, discounted at the finance rate
- n = Number of periods
A Real Example: PE Fund Investment
Consider a typical private equity fund investment with these cash flows:
| Year | Cash Flow |
|---|---|
| Year 0 | −$100,000 |
| Year 1 | +$50,000 |
| Year 2 | +$50,000 |
| Year 3 | +$50,000 |
Traditional IRR
23.4%
Assumes reinvestment at 23.4%
MIRR (8% reinvestment)
17.5%
More achievable target
That 5.9 percentage point gap matters. Relying on IRR alone could mean overestimating returns by 25%.
When to Use IRR vs MIRR
📊 Use IRR When:
- Comparing against industry benchmarks
- Communicating with investors who expect IRR
- Simple projects with minimal interim cash flows
- Quick screening of multiple opportunities
✅ Use MIRR When:
- Making internal go/no-go decisions
- Projects with significant interim distributions
- Comparing projects of different sizes/durations
- When you want realistic return expectations
How to Calculate MIRR in Excel
The Excel formula is simple:
=MIRR(B2:B4, 8%, 8%)
Where:
- B2:B4 = Your cash flow range (Year 0 to Year 3)
- First 8% = Finance rate (cost of borrowing)
- Second 8% = Reinvestment rate (what you earn on cash)
💡 Pro Tip: Many analysts use their company's WACC (Weighted Average Cost of Capital) for both rates. A common starting point is 8-10%.
The Multiple IRR Problem (And How MIRR Fixes It)
Traditional IRR has another quirk: when cash flows switch signs multiple times (negative → positive → negative), you can end up with multiple valid IRR solutions.
Take a mining project with environmental cleanup costs at the end:
- Year 0: −$1,000,000 (initial investment)
- Years 1-5: +$400,000/year (operating profits)
- Year 6: −$500,000 (environmental cleanup)
This project might have IRRs of both 14% and 65%. Which is correct? Neither — or both. It's ambiguous.
MIRR always produces a single, unambiguous result because it compounds all cash flows to a single terminal value and discounts all costs to a single present value.
Industry-Specific Guidance
| Industry | Typical IRR | Recommended Reinvestment Rate | MIRR Notes |
|---|---|---|---|
| Private Equity | 20-30% | 8-12% | Distributions are often reinvested in public markets |
| Real Estate | 12-20% | 6-10% | Rental income may go into lower-yield savings |
| Venture Capital | 25-40%+ | 5-8% | High IRR targets; MIRR reveals realistic expectations |
| Infrastructure | 8-15% | 5-8% | Long-duration projects benefit most from MIRR |
The Scale Problem: IRR Ignores Size
Both IRR and MIRR share a blind spot: they completely ignore project size.
Project A
50% IRR
$10,000 invested → $15,000 return
NPV: $5,000
Project B
15% IRR
$1,000,000 invested → $1,150,000 return
NPV: $150,000
Based on IRR alone, Project A looks 3x better. But which actually makes you wealthier? Project B adds 30x more value to your net worth.
💡 Best Practice: Use IRR/MIRR to screen and compare, but use NPV (Net Present Value) for the final go/no-go decision when project sizes differ significantly.
Don't Forget: Projections Are Just Guesses
Both IRR and MIRR take your cash flow forecasts at face value. Reality is messier:
- Rental income fluctuates with vacancies
- Exit timing and valuations are uncertain
- Operating costs can spike unexpectedly
- Market conditions change mid-project
⚠️ Reality Check: A 20% MIRR based on optimistic projections is meaningless if those cash flows never materialize. Always run sensitivity analysis: What happens if cash flows are 20% lower? What if exit is delayed by 2 years?
Experienced investors don't rely on a single number. They run best case, base case, and worst case scenarios to understand the full range of outcomes.
Bottom Line: Which Should You Use?
🎯 Our Recommendation
Calculate both IRR and MIRR:
- Use IRR for external communication and benchmarking
- Use MIRR for internal decision-making and setting realistic expectations
- If the gap between them is large (> 5%), be skeptical of the IRR
Knowing when to use which metric—and when to look beyond both—is what separates casual investors from serious ones.