Difference Between IRR and MIRR

Difference Between IRR and MIRR

What is IRR?

Internal Rate of Return or IRR is a measure in capital budgeting parlance which is used for estimating the profit that can be obtained from the investments.

Internal rate of return is a type of discount rate that is instrumental in making the net present value of all the cash flows from any project equal to zero.

In simple words, it can be referred to as the compounded annual rate of return that can be earned on an investment or a project.

What is IRR?

What is MIRR?

The modified internal rate of return (MIRR) presumes that constructive cash flows are reinvested to the company’s cost of capital and that the inceptive outlays are funded at the company’s financing cost. It is a development over IRR and changes many deficiencies like different IRR is deleted, checks reinvestment price issue and initiates outcome, that is in a link with the today value method.

What is MIRR?

Here are some points of difference between the IRR and MIRR

IRR

MIRR

                                                                Definition
IRR is the discount amount for investment that corresponds between initial capital outlay and the present value of predicted cash flows. MIRR is the price in the investment plan that equalizes the latest value of cash inflow to the first cash outflow.
                                                          What does it mean?
A discount rate at which NPV of all cash flow from a project becomes zero It is a modified form of IRR in which the NPV of the inflow (cash flow) is equal to the outflows (investment) 
                                                        Basis of Assumption
It assumes that positive cash flows from a project are reinvested on the same rate of return as that of investment It assumes that positive cash flows are reinvested based on cost of capital of the firm.
                                                              Precision
IRR is comparatively less precise in calculating the rate of return MIRR is much precise than IRR

The above mentioned is the concept, that is elucidated in detail about ‘Difference between IRR and MIRR’ for the Commerce students. To know more, stay tuned to BYJU’S.

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