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Learn how to calculate MIRR with your financial calculator
This article will show you how to use your financial calculator to calculate MIRR.
Technology has beautifully given us the privilege of accessing the whole world at our fingertips. We can talk with our loved ones who are miles apart and carry out functions that generally take hours and get information about anything and everything under the sun and beyond.
Technology is the entity that rules our lives while sitting on a wired throne. Time and distance are obsolete terms, their drawbacks insignificant now, due to the evolution of technology.
One such technological advancement is the financial calculator, through which we can calculate the financial values with just a few clicks.
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How to calculate MIRR on a financial calculator
Calculators & Their Advantages
Calculators, in general, are handy and save a significant proportion of the time. The specific ones like scientific and financial calculators are particularly beneficial for the people of those fields.
Those from a business or finance background have an idea about how time-consuming it is to calculate such high-value equations, which require precision at every step because one mistake can ruin the whole equation.
It can be frustrating to realize that one miscalculates or misstep can topple the whole calculation like a house of cards blown away by the wind. Financial calculators can be utilized to procure values of simple interest, compound interest, and many others.
What Is MIRR?
One of the most usual benefits of the financial calculator is that we can easily program the device to calculate such equations not available on the device.
The varied range of equations and calculations done on the financial calculator?makes it one of the most useful devices in business and finance.
The Modified Internal Rate of Return, commonly abbreviated as MIRR, is one of the more complex calculations that measure the value of the annual percentage return of an investment if we reinvent some amount periodically pre-finalized rate of return, for a more extended period.
Compared to the Internal Rate of Return (IRR), the value of MIRR is more accurate in portraying the cost and profitability of a project or investment.
The internal rate of return termed as the discount rate and modified internal rate of return are based on the calculation of the Net Present Value (NPV). The primary purpose or motive behind calculating MIRR’s values is to find out the ranks of different projects or investments with different sizes.
How To Calculate MIRR On Financial Calculator? When there is a fluctuation between the positive and negative signs in the calculation of the investment rate of return, it is possible to have multiple IRR values.Compared to the Internal Rate of Return (IRR), the value of MIRR is more accurate in portraying the cost and profitability of a project or investment. Click To Tweet
In such calculations, MIRR proves to be more accurate than the method of IRR. The MIRR (modified rate of return) can be calculated by following the steps given:
- Firstly, utilize the financial calculator’s cash flow function to find out the present value of the negative cash inputs at a secured rate. Insert the digit 0 for any cash inflow, which is positive and note down the result values.
- Use the same cash flow function to find out the future value of the positive cash inflow at the reinvestment rate and insert the digit 0 for any value of the cash inflow, which is negative.
- To save the total number of years or periods, store the number in N, keep the present value of the negative cash inflows in PV, and the future value of the positive cash inflows in FV, respectively.
- Now, use the I/YR key to find out the actual interest rate.
A practical explanation To understand the practical application of the calculation of the modified internal rate of return by using a financial calculator, we can take the help of an illustration.
Given below are some values which can be put in the financial calculator to find out the modified internal rate of return:
Let us assume that 5-year investment expenses to Rs. 1000 and we get Rs. 280 in cash inflow per year, if we hypothetically reinvest at a 10% rate of return. Firstly, let us find out the future value:
- Put the value of 0 and press the key labeled PV to insert the present value.Â
- We also have to insert the number of years that the investment is to be carried out, which is five years, so put the digit 5 and then press the N key on the financial calculator.Â
- We insert the reinvestment rate, which is 10%, and in the financial calculator, we insert the digit 0.1 and then press the I/YR key on the calculator.Â
- Now, we insert the value of the annual cash inflow, which we are obtaining from the investment; it is Rs. 280 in our particular example, so we insert the digits 280 and then press the PMT key.`Â
- Ultimately, we have to utilize the FV key on the financial calculator to determine the future value of the reinvested cash inflow at the end of 5 years, which is Rs. 1709.428.Â
Now, to find out the modified internal rate of return (MIRR):
- To start, erase the values in the time value of money keys, which we utilize to calculate future values.Â
- Now, insert the basic expenditure of the investment, which is Rs. 1000.Â
- Later, we insert the number of years of the holding period, which is five years, so we add 5.Â
- Insert the digit 0 and press the PMT key, we use 0 for the payment function because we have already found out the future value.Â
- We now insert the future value, which was 1709.428 then we press the FV key on the financial calculator.Â
- To find the final MIRR value, we press the I/YR key; the value we get is 11.3%, which is the final modified internal rate of return.Â
The method to calculate MIRR on a financial calculator might seem a bit complex at first glance. Still, it is a simplified version, and saves our time and efforts and increases accuracy.
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