what is mirr how does it address the challenges of internal rate of return

the modified internal rate of return or m-i-r-r refers to a measure that determines the attractiveness of an investment and the financial measure is used to compare different investments m-i-r-r is a modification of internal rate of return or i-r-r irr formula and identifies the viability of a project.

in case the mirr of a project is higher compared to its expected return the investment is expected to be attractive experts generally disapprove undertaking a project.

if it's mii is negative a project's attractiveness increases with a rise in mirr the financial measure is used to rank projects of unequal size so how does m-i-r-r address the challenges of irr while irr is a popular measure of investment its

tendency to overstate the profitability of a project can result in capital budgeting mistakes,

however mirr gives more realistic assumed reinvestment rates from future cash flow thus mirr comes into the picture to address a few problems associated with irr and the major problem with irr is that  it assumes the obtained cash flows are reinvested at the same rate they were generated on the other hand mirr assumes that the positive cash flows of a project will be reinvested at the external rate of return which is generally fixed equal to the cost of capital of the company irr also attracts confusion.

in case of a project with different periods of positive and negative cash flows in such cases the irr calculate more than one number leading to uncertainty but m-i-r-r always leads to a single solution m-i-r-r is generally said to give a more realistic picture of the return on the investment project compared to the standard irr.

and also the mirr is commonly lower than the irr so what are the limitations of using f-i-r-r the calculation of an mirr requires you to estimate the cost of capital to reach a decision such a computation can vary based on the assumptions made

just like irr the mirr results in suboptimal decisions these decisions do not maximize value when several investment options are being considered at once also mirr does not actually quantify the different impacts of investments in absolute terms in addition mirr does not produce optimal results.

in the case of capital rationing mirr is a challenging subject for people on non-financial background to understand mir may not be much use in ranking projects of different sizes the reason is that a larger project with a smaller mirr may have a higher net present value but there are variants of mirr which can be used in such cases.