MIRR Calculator Using WACC
A professional tool to determine the Modified Internal Rate of Return, factoring in the Weighted Average Cost of Capital (WACC) as the financing rate.
Cash Flow Visualization
What is the MIRR Calculator Using WACC?
The Modified Internal Rate of Return (MIRR) is a financial metric used to assess the profitability of an investment. It is an improvement upon the traditional Internal Rate of Return (IRR) because it provides more realistic assumptions about the reinvestment rate of cash flows. This MIRR calculator using WACC is specifically designed to use the Weighted Average Cost of Capital as the financing rate, which is a common and financially sound practice.
Unlike the IRR, which assumes that all positive cash flows are reinvested at the project’s own IRR, the MIRR allows for the specification of a separate reinvestment rate. This addresses a key flaw in the IRR model, as reinvesting at the IRR is often not feasible. Furthermore, MIRR provides a single, unambiguous result, resolving the issue of multiple IRRs that can occur with non-conventional cash flows.
The MIRR Formula
The MIRR calculation involves three main steps: calculating the future value of all positive cash flows, calculating the present value of all negative cash flows, and then finding the rate of return that equates the two.
Here’s a breakdown of the components:
| Variable | Meaning | Unit (Auto-Inferred) | Typical Range |
|---|---|---|---|
| FV of Positive Cash Flows | The future value of all cash inflows, compounded at the reinvestment rate to the end of the project’s life. | Currency ($) | Varies |
| PV of Negative Cash Flows | The present value of all cash outflows (including the initial investment), discounted at the finance rate (WACC) to period zero. | Currency ($) | Varies |
| n | The total number of periods for the investment. | Years/Periods | 1 – 50+ |
Practical Examples
Example 1: Standard Project
A company is considering a project with an initial investment of $100,000. It’s expected to generate cash flows of $30,000, $40,000, and $50,000 over the next three years. The company’s WACC is 9% (finance rate), and it can reinvest cash flows at 7% (reinvestment rate).
- Inputs: Initial Investment = $100,000; Cash Flows = 30000, 40000, 50000; Reinvestment Rate = 7%; Finance Rate (WACC) = 9%
- Results: The MIRR for this project would be calculated, providing a clear percentage return that can be compared against the company’s hurdle rate. Using a financial calculator, the MIRR is approximately 14.19%.
Example 2: Project with a Negative Cash Flow
Consider a project with an initial cost of $200,000. Cash flows are: Year 1: $80,000, Year 2: $90,000, Year 3: -$20,000 (for decommissioning), Year 4: $100,000. The WACC is 10% and the reinvestment rate is 8%.
- Inputs: Initial Investment = $200,000; Cash Flows = 80000, 90000, -20000, 100000; Reinvestment Rate = 8%; Finance Rate (WACC) = 10%
- Results: The MIRR formula correctly handles the mid-project negative cash flow by discounting it back to the present value using the finance rate, while compounding the positive flows forward. This gives a more accurate return profile than IRR, which can struggle with non-conventional cash flows. The MIRR would be approximately 12.55%.
How to Use This MIRR Calculator using WACC
- Enter Initial Investment: Input the total upfront cost of the project as a positive number.
- Provide Cash Flows: Enter the series of expected cash flows, separated by commas. For cash outflows in future periods, use a negative sign (e.g., -5000).
- Set Reinvestment Rate: Enter the rate at which you expect to reinvest the positive cash flows generated by the project. This is often a conservative estimate like the risk-free rate or the company’s cost of capital.
- Set Finance Rate (WACC): Enter the rate used to finance the project. For corporate projects, this is typically the company’s WACC calculator.
- Interpret the Results: The calculator instantly provides the MIRR, the future value of inflows, the present value of outflows, and the number of periods. A project is generally considered acceptable if its MIRR is greater than the hurdle rate (often the WACC itself).
Key Factors That Affect MIRR
- Cash Flow Timing and Magnitude: Larger and earlier cash inflows increase MIRR, while later or smaller inflows decrease it.
- Reinvestment Rate: A higher reinvestment rate will increase the future value of positive cash flows, leading to a higher MIRR. This is a critical assumption.
- Finance Rate (WACC): A higher finance rate increases the present value of costs (outflows), which in turn lowers the MIRR.
- Project Length (n): For profitable projects, a longer duration can sometimes lead to more opportunities for reinvestment, though the effect is complex and tied to the other variables.
- Initial Investment Amount: A lower initial investment for the same set of cash inflows will result in a higher MIRR.
- Presence of Negative Cash Flows: Intermediate negative cash flows must be financed, and their discounting at the WACC lowers the overall return, reducing the MIRR.
Frequently Asked Questions (FAQ)
1. Why is MIRR better than IRR?
MIRR is generally considered superior because it uses a more realistic assumption for the reinvestment of cash flows. IRR assumes reinvestment at the IRR itself, which can be unrealistically high, while MIRR allows for a more practical rate, like the company’s WACC. This makes the MIRR a more reliable indicator of a project’s true profitability.
2. What should I use for the reinvestment rate?
A common and conservative choice is the company’s WACC. This assumes that cash flows are reinvested into the company’s average risk projects. Other options include a risk-free rate or a specific rate based on known reinvestment opportunities.
3. What should I use for the finance rate?
The finance rate should be the cost of the funds used for the project. In a corporate setting, the Weighted Average Cost of Capital (WACC) is the most appropriate rate, as it represents the blended cost of all capital sources (debt and equity).
4. Can MIRR handle negative cash flows?
Yes, perfectly. Unlike IRR, which can produce multiple or no solutions with non-conventional cash flows (e.g., negative flows after positive ones), MIRR handles them by discounting all outflows to the present and compounding all inflows to the future, always yielding a single, reliable result.
5. How do I interpret the MIRR result?
The MIRR should be compared to your required rate of return, or “hurdle rate.” If the MIRR is greater than the hurdle rate (which is often the WACC), the project is expected to create value and should be considered for acceptance.
6. Does this calculator use currency units?
The calculations are unitless in terms of currency. You can think in terms of Dollars, Euros, etc., as long as you are consistent across all inputs. The final MIRR result is a percentage, which is universal.
7. What is the difference between this and an IRR calculator?
An IRR calculator finds the single discount rate where Net Present Value (NPV) is zero, implicitly assuming cash flows are reinvested at that same rate. This MIRR calculator separates the reinvestment rate from the financing rate (WACC) for a more accurate analysis.
8. When is MIRR equal to IRR?
MIRR will be equal to IRR only in the specific case where the reinvestment rate and the financing rate used in the MIRR calculation are both equal to the IRR itself.