Introduction to Finance

modifi ed internal rate of return 
(MIRR) method 
a technique 
that solves some of the problems 
presented by IRR; MIRR rankings 
of mutually exclusive projects 
with comparably sized initial 
investments will agree with the 
NPV rankings of those projects
$5800 (1.10)
4
–20,000
Terminal
Value = $35409.58
1
2
3
4
5
$5800 (1.10)
3
$5800 (1.10)
2
$5800 (1.10)
$8491.78
$7719.80
$7018.00
$6380.00
$5800.00
FIGURE 17.2
 MIRR for 
Project A

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536
C H A PT E R 1 7 Capital Budgeting Analysis
Third, we fi nd the discount rate that sets the PV of the outfl ows equal to the terminal 
value:
FV = PV(1 + 
r
)
n
= $35,409.58 = $20,000(1 + 
r
)
5
Solving, we fi nd that the MIRR is 12.10 percent
Using a spreadsheet, Excel has a function, MIRR, to do this calculation:
The MIRR function has the form, =MIRR(cell of time zero cash fl ow : cell of last cash fl ow, 
fi nance rate, re-investment rate). The fi nance rate is the interest rate paid on borrowing to 
fi nance the cash outfl ows. The re-investment rate is the rate used to compound or fi nd the FV 
of the cash infl ows. We used the fi rm’s required rate of return of 10 percent for both of these 
in this example.
Similar calculations show the MIRR for project B is 10.86 percent. MIRR ranks project 
A (12.10 percent) higher than project B (10.86 percent); this is the same ranking as NPV gave 
the projects.
The decision rule for MIRR is similar to that for IRR—a project is acceptable if its MIRR 
exceeds the project’s minimum required return. A drawback to the MIRR is that it is a relative 
measure of attractiveness; it does not indicate the dollar amount by which projects change 
shareholder wealth.
12
17.6
Capital Budgeting Techniques—
Profitability Index
Another discounted cash fl ow technique for evaluating capital budgeting projects is the