# Talk:Modified internal rate of return

## Article language

the article is written in a very casual and imprecise language. Needs to be spruced up.

sandy 06:11, 8 April 2007 (UTC)

The external link entitled "MIRR Examples and Equations" goes to a page that talks about IRR, not MIRR. Should this link be moved to the IRR page? Thestorm042 02:24, 23 March 2007 (UTC)

## The equation used in the MIRR calculation.

The equation used in the MIRR calculation is wrong. The correct equation is witghout the factor (1+finance rate) in the denominator and is on power of n-1 in the nominator rather than n. —Preceding unsigned comment added by Gtaljan (talkcontribs) 14:24, 29 January 2008 (UTC)

corrected--Samnikal (talk) 02:16, 20 October 2009 (UTC)

## Present worth ratio

The article mentions a "present worth ratio", and includes citations, but provides no links or definition. Wikipedia has no article mentioning a "present worth ratio" except this one, and Google turns up this article first when searching for it.

Some elaboration of the concept would be beneficial.

Agree. Removed this paragraph.--Samnikal (talk) 04:59, 23 October 2009 (UTC)

## IRR not correctly represented

The author states a myth about the IRR as a problem. There is no reinvestment rate used to calculate the IRR and there is not an assumed reinvestment rate occurring either. The IRR is equal the the discount rate that makes the NPV discount rate 0. So to state that the IRR uses a reinvestment rate is to state that the NPV uses a reinvestment rate, which of course is not true.

The MIRR is the IRR of the future value calculation.

The second problem about the irregular cash flows is true, but that is what the XIRR is designed for. —Preceding unsigned comment added by Planease (talkcontribs) 23:19, 14 September 2009 (UTC)

It's not a myth. Computing the discount rate that makes the NPV equal to zero is mathematically equivalent to assuming that all interim proceeds are reinvested at the project's rate of return, and then seeing what discount rate equates the future value of the project to the start-up cost. Duoduoduo (talk) 15:01, 2 February 2011 (UTC)
I will disagree with Duoduoduo on this. IRR is just the discount rate at which the NPV of a cashflow is zero, it does not assume anything about reinvestment. E.g. if my cashflow is -1000 today, +600 six months after today, +600 year after today, then the middle +600 is not assumed to be reinvested at all! IRR does not attempt to compare the value of a cash flow after a year (when project ends) vs today. The middle +600 can be used for consumption already in 6 mothns, not 12 (when project ends). In fact, if I do plan to reinvest the middle +600 for half a year at rate, say, 10% nominal p.a., then I can explicitly include this in my cash flow: -1000 today, +600-600=0 in 6 months from today, +600 + 600*(1.05)= +600+630 in 12 months from today. Then I just calculate the IRR on that. The article, which is cited after the sentence in question of the wikipedia article, attempts to explain why IRR may be not the best choice for estimating project worth, but the author, in my opinion, presents an ill constructed argument for this.194.126.99.204 (talk) 09:33, 9 September 2011 (UTC)
I tend to agree that the IRR is a discount rate and it does not assume anything about the reinvestment rate. It is common to confuse it in literature. If you know (a) the cost of the project and (b) all the cash flows, then you can calculate the IRR. Until this point nobody said anything about the FV of the project; it is unkown. To calculate the FV you need an extra variable and that is the (c) reinvestment rate. You might say, that the FV is simply the cash flows compounded by the IRR, but that is already introducing the extra assumption that (c) reinvestment rate = IRR. However, the IRR method itself is just a discount rate, it does not tell you to assume that the reinvestment rate = IRR. --Wikijasmin (talk) 21:09, 25 October 2012 (UTC)
I also agree that the IRR does not assume reinvestment of cash inflows. The Wikipedia entry for IRR contains a section called "The Reinvestment Misconception". In the Talk section for the IRR entry I added the following comment about this section: "The reinvestment misconception section may not have had a lot of citations but it is correct and is well-done. There are a number of good citations available. See, for example, Jack Lohman's article (Engineering Economist, summer 1988), or Keef and Roush's article (Accounting Education,2001,10(1), pp.105-116). At its simplest, the IRR cannot be based on an implicit assumption that cash inflows will be reinvested at the IRR because the IRR would be the same even if the firm chooses to distribute all cash inflows to shareholders rather than to reinvest them. There is no necessity to reinvest any of the cash flows. Of course if inflows were to be reinvested at the IRR rate then this combined project (the original project combined with the reinvestment project) would also have an IRR the same as the original project. However the combined project would be a very different project from the original project, since it would have a longer duration and likely a different NPV. Somehow, some people have confused the unlikely possibility of reinvesting a project's inflows at the IRR as an implicit assumption of the IRR calculation. However the cash flows of a project are reinvested (if they are) at whatever rate,the IRR of the original project is unchanged."GrayBorn (talk) 22:57, 2 September 2014 (UTC)

This whole reinvestment assumption is fundamentally flawed, the goal of the npv (and irr) is to calculate the value of the initial project, not about the value of the investments you are going to do with free cash flows that this project returns. That is simply another project! For all we know free cash flows can go to the shareholder that will in his turn burn it. That doesnt say anything about the value creation of the initial project. This seems very logic to me, that is why i am staggered to see that there is so much academic debate about it for years. A very good paper that prooves this point can be downloaded for free at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1982828. Some highlights in this paper:

“There is an ongoing dispute about the assumption of reinvesting intermediate cash flows at cost of capital in calculation of NPV and at IRR in calculation of implied yield to maturity. The lack of conclusive evidence lends support to confusion around the issue. This paper provides logical and mathematical proofs that there is no implicit reinvestment assumption embedded in present value formula and in IRR formula. We prove this conclusion by rewriting NPV and IRR equations in expanded form in order to discriminate between the discount rate for the initially evaluated cash flow occurring at time t and the discount rate for reinvested intermediate cash flows occurring after time t. In so doing we pay attention not only to reinvestment rate for intermediate cash flows, but also emphasize and justify that discount rate for intermediate cash flows over life of the project is not the same as discount rate of the project’s expected cash flows. The revised formulas do not prohibit reinvestment of intermediate cash flows; however the discounting rate for reinvested intermediate cash flows should be the same as the reinvestment rate. This means that reinvestment rate can be arbitrary and not necessarily the cost of capital in the case of NPV. In much the same way, in the case of IRR the reinvestment rate for intermediate cash flows is not necessarily be equal to IRR. The conclusion is that reinvestment assumption is a wrong belief.”

“Instead there is no need in reinvestment of intermediate cash flows at all. We also show that MNPV and MIRR formulas contain erroneous restrictive assumptions about the discount rate for intermediate cash flows and can be highly misleading measures. We provide corrected formulas for MNPV and MIRR and demonstrate that MNPV and MIRR strongly depend on the life of the project, which makes estimates unstable and unreliable. MNPV and MIRR admix effects of expected reinvestment of intermediate cash flows to the outcomes of initial investment being evaluated. In fact the initial investment and reinvestments of intermediate cash flows, if they actually have to take place, are different projects and should be measured separately.”

I think we should let the readers of the mirr know that the measure is very controversial. I am happy to see other papers that prove me, and the paper I justed posted here, wrong. — Preceding unsigned comment added by Sneak1979 (talkcontribs) 21:11, 30 June 2015 (UTC)