What is Modified Internal Rate of Return (MIRR)?
The modified internal rate of return is a refinement of IRR that fixes two of its main weaknesses: the unrealistic assumption that interim cash flows are reinvested at the IRR itself, and the multiple-IRR problem when cash flows change sign more than once.
How It Works
- Reinvest positive cash flows at the cost of capital (or a reinvestment rate)
- Compound them to the end of the project to get a single terminal value
- Discount negative cash flows back to time zero at the financing rate
- MIRR is the rate that equates the PV of negatives with the terminal value
- Always gives a single, more conservative answer than IRR
Saudi Context
Saudi infrastructure and energy projects with multi-year cash outflows and inflows tend to mislead the standard IRR. MIRR is the go-to metric for PIF-backed mega-projects and PPP arrangements where the reinvestment assumption really matters.
Example
A project costs SAR 50M upfront and generates SAR 15M for five years. Standard IRR comes out at 15.2% but assumes interim cash flows earn 15.2%. Using a more realistic 8% reinvestment rate, MIRR falls to 11.4% — a truer estimate of the project return.