Question

What is the difference between IRR and MIRR ? Explain with an example.

Answer 1

IRR :- INTERNAL RATE OF RETURN

internal rate of return is a measure in capital budgeting parlance which is used for estimating the profit that can be obtained from the investments.

Internal rate of return is a type of discount rate that is instrumental in making the net present value of all the cash flows from any project equal to zero.

in simple words, it can be referred to as the compounded annual rate of return that can be earned on an investment or a project.

MIRR :- MODIFIED INTERNAL RATE OF RETURN

the modified internal rate of return presumes the constructive cash flows are reinvested to the company's cost of capital and that the inceptive outlays are funded at the company's financing cost. It is a development over IRR and changes many deficiency is like different IRR is deleted, checks reinvestment price issue and initiates outcome, that is in a linked with the today value method.

Differences between IRR and MIRR :-

Particulars	IRR	MIRR
Definition	IRR is the discount amount for investment that corresponds between initial capital outlay and the present value of predicted cash flows	MIRR is the price in the investment plan that equalizers the latest value of cash inflows to the first catch out room
Waht does it mean?	discount rate at which NPV of all cash flows from a project becomes zero	it is a modified form of CRR in which the npv of the inflow is equal to the outflow
Basis of assumption	assumes that positive cash flows from a project are reinvested on the same rate of return as that of investment	it assumes that positive cash flows are invested based on the cost of capital of the firm
Precision	IRR is comparatively less precise in calculating the rate of return	MIRR is much precise than IRR

IRR = [( cashflows )÷ (1+r)ⁱ] - initial investment

r = rate of interest

i = time period

MIRR = [(FVPCF) ÷ (PVNCF)]^{1 ÷n} - 1

FVPCF = future value of positive cashflows at reinvestment rate

PVNCF = present value negative cash flows at finance rate

n = number of periods

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