IRR vs. MIRR: Which Metric Truly Reflects Your Investment’s Real Return?
IRR is the discount rate that sets a project’s net present value to zero, assuming cash flows are reinvested at the same rate. MIRR explicitly forces reinvestment at a separate, more realistic rate—usually your cost of capital—then solves for the rate that grows your outflow to your terminal inflow.
People swap IRR and MIRR because both spit out a single, tidy percentage. IRR feels intuitive, but analysts panic when its “reinvest at IRR” fantasy clashes with actual borrowing costs. MIRR, though less famous, rescues models from that fantasy, making the metric harder to ignore when pitching cautious CFOs.
Key Differences
IRR: assumes every interim cash flow earns the IRR itself, often inflating results. MIRR: separates finance (negative) and reinvestment (positive) rates, producing a single, lower figure that better mirrors real borrowing and lending conditions. One metric dreams; the other budgets.
Which One Should You Choose?
If your project’s interim cash piles up in a money-market fund or you face strict borrowing terms, pick MIRR. Use IRR for quick screens or when reinvestment opportunities truly match the IRR—rare, but possible in high-yield niches.
Can IRR ever exceed MIRR?
Yes. When cash inflows arrive late and the reinvestment rate is low, IRR’s optimistic compounding outruns MIRR’s conservative one.
Do Excel functions differ?
Yes. Use =IRR(range) and =MIRR(range, finance_rate, reinvest_rate) to automate each metric.