Why is the IRR not the MIRR the industry standard rate of return?

Answer

The IRR assumes all cash flows are reinvested at the IRR. All you need are the property cash flows and the initial outlay to solve the equation. So, it is a simple and objective calculation. For reference, the calculation is as follows:

NPV = 0 = CF0/(1+IRR)^0 + CF1/(1+IRR)^1 + ... + CFn/(1+IRR)^n

The MIRR assumes that positive cash flows are reinvested at a reinvestment rate. MIRR also assumes that negative cash flows are financed by the company at a finance rate. For reference the calculation is as follows:

(( NPV of positive cash flows at reinvestment rate ) /
( NPV of negative cash flows at finance rate ))^(1/(n-1) - 1

This makes MIRR unsuitable as an industry standard.

First, different firms have different reinvestment rates and different finance rates. So, MIRR cannot be used to compare investments purchased or sold by different companies.

Second, the rates will change over time, thus making it impossible to compare MIRR's at different intervals.


MIRR is best used internally by a particular firm choosing between several investments at a given time.

First answer by Da5idM. Last edit by Da5idM. Contributor trust: 13 [recommend contributor]. Question popularity: 16 [recommend question]