Modified internal rate of return (MIRR) is a variant of IRR that assumes that cash generated is re-invested at the cost of capital (usually the WACC). This is preferable because:
- Any series of cashflows has a single MIRR.
- It takes account of the rate at which cash generated is re-invested.
Consider the returns at the end of the life time of a project, including returns on cash generated and re-invested elsewhere. For the IRR to equal the total return the project has generated at that time, the cash inflows must be re-invested at the same rate as the IRR. This is unrealistic.
The MIRR does suffer from some of the other drawbacks of IRR. Relying on it can lead to an incorrect choice between mutually exclusive investments.