The MIRR is similar to the IRR but is theoretically superior in that it overcomes two weaknesses of the IRR. The MIRR correctly assumes reinvestment at the project’s cost of capital and avoids the problem of multiple IRRs. However, please note that the MIRR is not used as widely as the IRR in practice.
There are 3 basic steps of the MIRR:
(1) Estimate all cash flows as in IRR.
(2) Calculate the future value of all cash inflows in the last year of the project’s life.
(3) Determine the discount rate that causes the future value of all cash inflows determined in step 2, to be equal to the firm’s investment at time zero. This discount rate is known as the MIRR.
MIRR is better than IRR because
1. MIRR correctly assumes reinvestment at the project’s cost of capital.
2. MIRR avoids the problem of multiple IRRs.