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Know the Modified Rate of Return (MIRR) of Your Investment

Aug 18, 2007
The modified internal rate of return is a financial calculation which is used by investors to determine the possible success and attractiveness of an investment choice. The modified internal rate of return assumes that cash-flow generated is reinvested into the business. While the modified internal rate of return has its value, it also has some limitations.

The Internal Rate of Return (IRR)

The internal rate of return, separate from the "modified" version, has long been used to determine whether or not it is a good idea to make a long term investment. The internal rate of return (IRR) has historically been used by corporations to calculate the ability of an investment to perform over time. The IRR is essentially the amount of income which comes from the corporation's invested assets and funds.

The goal of any business is to have its IRR be larger than any other IRR which could be realized by another investment option. For any investment you are considering, you will want to calculate the IRR and compare that IRR to the returns you could realize in other investments. The goal in investing is to have the highest IRR as possible to make sure you at least hit the break-even point in your investments.

The Modified Rate of Return (MIRR)

An enhancement to the traditional IRR calculation is the MIRR, the modified internal rate of return. This is a bit more of a complex equation which is used to gauge how effective an investment may really be. The MIRR is used to look at the possible rate of return on your investment after you have re-invested your business profits over time. By calculating the MIRR, rather than just the IRR, you can easily get a better picture of how your investment can be since the MIRR takes into account the reinvestment of profits and not just your initial investment.

When you are looking at commercial property investment, you will want to use the MIRR because it will not mislead you like the IRR can. The MIRR uses much more accurate data than the IRR and this makes it much more reliable to use. The formula for the MIRR uses both positive and negative values, the investment finance rate, the net present value, and also the re-investment rate in its calculation.

In order for you to calculate the IRR and MIRR of your potential investment property deals you are well advised to consult a financial professional. However, if you choose to do the calculations on your own you can easily find calculators on the internet or can use spreadsheet software such as Microsoft Excel.

By understanding how the IRR and the MIRR differ, you can learn to better judge your investments for their longevity and success. Knowing just the IRR is of value, but because the MIRR uses more accurate data, the MIRR will be your best guide to keeping your investments safe and as profitable as possible.
About the Author
The modified internal rate of return is used to determine the possible success of an investment choice. KISCL, http://www.kiscl.com/, has all of the tools and resources of experienced real estate professionals to help you succeed in the commercial market.
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