MIRR Calculator: Calculating MIRR using WACC
A powerful tool for accurately calculating MIRR using WACC (Weighted Average Cost of Capital) as the finance and reinvestment rate. This approach provides a more realistic measure of a project’s profitability compared to the standard IRR.
What is Calculating MIRR using WACC?
Calculating MIRR using WACC is a financial valuation technique used to measure the profitability of a potential investment. MIRR stands for Modified Internal Rate of Return, a metric that improves upon the traditional Internal Rate of Return (IRR) by providing more realistic assumptions about cash flow reinvestment. Instead of assuming cash flows are reinvested at the project’s own IRR, MIRR assumes they are reinvested at a different rate—in this case, the firm’s Weighted Average Cost of Capital (WACC).
This method is preferred in capital budgeting because the WACC represents the true opportunity cost of capital for a company. It provides a single, unambiguous solution, avoiding the multiple-IRR problem that can occur with non-conventional cash flows. For a project to be considered viable, its MIRR should be greater than the WACC.
MIRR Formula and Explanation
The formula for calculating the Modified Internal Rate of Return is derived from the future value of positive cash flows and the present value of negative cash flows.
MIRR = ( (FV of Positive Cash Flows / PV of Negative Cash Flows)(1/n) ) – 1
This formula effectively determines the discount rate that equates the present value of all cash outflows with the present value of the project’s terminal value, where the terminal value is the future value of all cash inflows compounded at the reinvestment rate (WACC).
| Variable | Meaning | Unit / Type | Typical Range |
|---|---|---|---|
| FV of Positive Cash Flows | The future value of all positive cash inflows, compounded at the reinvestment rate (WACC) to the end of the project’s life. | Currency | Positive Value |
| PV of Negative Cash Flows | The present value of all negative cash outflows (including the initial investment), discounted at the financing rate (WACC). This is an absolute value. | Currency | Positive Value |
| n | The total number of periods over which the cash flows occur. | Integer (e.g., Years) | 1 – 50+ |
Practical Examples
Example 1: Standard Project
A company is considering a project with an initial investment of $150,000. The projected cash inflows for the next four years are $40,000, $50,000, $60,000, and $70,000. The company’s WACC is 9%.
- Initial Investment: $150,000
- Cash Flows: 40000, 50000, 60000, 70000
- WACC (Finance & Reinvestment Rate): 9%
Using our calculator for calculating MIRR using WACC, the resulting MIRR for this project is approximately 14.54%. Since this is significantly higher than the 9% WACC, the project is financially attractive.
Example 2: Project with a Negative Cash Flow
Imagine a project requires an initial outlay of $200,000. It generates inflows of $80,000 in Year 1 and $90,000 in Year 2. However, in Year 3, it requires a further investment of $30,000 for maintenance, followed by a final inflow of $120,000 in Year 4. The WACC is 10%.
- Initial Investment: $200,000
- Cash Flows: 80000, 90000, -30000, 120000
- WACC (Finance & Reinvestment Rate): 10%
The calculation is more complex here. The future value of inflows is calculated from the $80k, $90k, and $120k streams. The present value of outflows includes the initial $200k and the discounted value of the $30k outflow in Year 3. This results in an MIRR of approximately 11.98%. As this is above the 10% WACC, the project is still acceptable. You can learn more about these concepts in our Capital Budgeting Techniques guide.
How to Use This MIRR Calculator
Our tool simplifies the process of calculating MIRR using WACC. Follow these steps for an accurate calculation:
- Enter the Initial Investment: Input the total upfront cost of the project at Period 0 as a positive number.
- Provide Periodic Cash Flows: In the text area, list the net cash flows for each subsequent period (Year 1, Year 2, etc.), separated by commas. For periods with a net loss or additional investment, use a negative number (e.g., -10000).
- Set the WACC Rate: Enter your firm’s Weighted Average Cost of Capital as a percentage. This tool assumes the WACC is used for both the finance rate (to discount outflows) and the reinvestment rate (to compound inflows).
- Calculate and Analyze: Click the “Calculate MIRR” button. The tool will display the primary MIRR result and key intermediate values like the Future Value of Inflows and Present Value of Outflows.
Interpret the result by comparing it to your WACC. If MIRR > WACC, the project is expected to add value. For a deeper dive, consider a full Discounted Cash Flow (DCF) Analysis.
Key Factors That Affect MIRR
Several factors can influence the outcome of the MIRR calculation:
- Timing of Cash Flows: Positive cash flows received earlier have more time to be reinvested, increasing the terminal value and boosting the MIRR.
- Magnitude of Cash Flows: Larger positive cash flows naturally lead to a higher MIRR, assuming all other factors are constant.
- The WACC Rate: A lower WACC (reinvestment rate) will result in a lower future value of inflows, thus lowering the MIRR. Conversely, a higher WACC can increase the MIRR, but it also sets a higher hurdle for project acceptance. A dedicated WACC Calculator can help ensure this input is accurate.
- Initial Investment Size: A larger initial investment increases the present value of outflows, which acts as the denominator in the MIRR formula, thus putting downward pressure on the MIRR.
- Project Duration (Number of Periods): A longer project provides more periods for positive cash flows to be reinvested and grow, which can positively impact the MIRR.
- Presence of Negative Cash Flows: Intermediate negative cash flows (outflows after Period 0) increase the total present value of costs, which will lower the final MIRR.
Frequently Asked Questions (FAQ)
MIRR is generally considered superior to the Internal Rate of Return (IRR) because it uses a more realistic assumption for the what is reinvestment rate. IRR assumes cash flows are reinvested at the IRR itself, which can be impractically high, whereas MIRR uses the firm’s cost of capital (WACC), which is more defensible. MIRR also resolves the issue of multiple IRRs for projects with non-conventional cash flows.
In the context of calculating MIRR using WACC, the WACC serves two roles: it is the ‘finance_rate’ used to discount all cash outflows to their present value, and it is the ‘reinvest_rate’ used to compound all cash inflows to their future value at the end of the project.
The calculator is period-agnostic. You can use it for monthly, quarterly, or semi-annual cash flows, as long as you are consistent. If you use monthly periods, ensure your WACC rate is also a monthly rate (e.g., annual WACC / 12).
Yes, an MIRR can be negative. A negative MIRR indicates that the project is expected to lose value, even after accounting for the reinvestment of any positive cash flows. The total future value of inflows is not enough to overcome the present value of the outflows.
It handles them correctly. The initial investment and any subsequent negative cash flows entered in the “Periodic Cash Flows” field are discounted at the WACC rate to find the total Present Value of Outflows.
While a higher MIRR is generally better, it shouldn’t be the only deciding factor, especially when comparing mutually exclusive projects of different scales. It is a good practice to also consider the Net Present Value (NPV), as a smaller project could have a high MIRR but add less absolute value than a larger project with a slightly lower MIRR. See our Net Present Value (NPV) Calculator for more.
A “good” MIRR is any value that is greater than the company’s Weighted Average Cost of Capital (WACC). If MIRR > WACC, the project is expected to generate returns in excess of its cost of capital, thereby creating value for shareholders.
MIRR provides a percentage rate of return, which is intuitive to understand. NPV provides an absolute currency value that a project is expected to add. Both are valuable. The key difference in an IRR vs MIRR analysis is that MIRR provides a better percentage-based metric, while NPV is often seen as the gold standard for absolute value creation.