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Modified Internal Rate of Return (MIRR)

The modified internal rate of return (MIRR) is an adaptation of the Internal Rate of Return (IRR). which is intended overcome the limitations of the latter. The MIRR and IRR are widely used by investors to select the most profitable investments.
The IRR has two important limitations, namely:
a) Positive cash flows are reinvested at the same rate of cost of capital;
b) In certain cash flow model are produced multiple results.
The MIRR eliminates these limitations and is used to evaluate alternative investments, such as the IRR.
The MIRR evaluate in an investment the possibilities: profitable, indifferent or loss, according to the results:
a) Greater than the cost of capital - satisfactory investment (profitable);
b) Equal to the cost of capital - indifferent investment (no profit or loss);
c) Less than the cost of capital - unsatisfactory investment (loss).
When is compared the rates of return obtained by both methods, the IRR result is always overestimating.
To calculate the modified internal rate of return, the values are positioned in chronological order of events. The first event always has a negative sign because it represents the initial disbursement of investment, thereafter, can occur inputs and outputs of resources.
Also to calculate the IRR is necessary to inform the interest rate for reinvestment and cost of capital.
The interest rates on reinvestment and capital costs must correspond to the appropriate periodicity of flow. For example, the periods: annual, quarterly and monthly, correspond to the rate, annual, quarterly and monthly, respectively.
How to calculate MIRR.

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