Calculating MIRR (Modified Internal Rate Of Return) Using Python And Numpy

Overview:

  • While the IRR - Internal Rate of Return for a set of cash flows assume the same discount rate for both positive and negative cash flows, the Modified Internal Rate of Return assumes different discount rates for them.
  • Since the external factors like inflation is not included in both IRR and MIRR calculation, in MIRR the discount rate for a positive cash flow (i.e., in flow) is typically less than the discount rate for a negative cash flow. Hence, MIRR is considered the more conservative and realistic when compared to IRR.
  • Both the techniques are applied and results are compared while assessing the return potential of an investment.

 

Example:

# Example Python program that calculates the Modified

# Internal Rate of Return on a set of cashflows(sometimes positive and sometimes negative)

# resulting from an initial investment

 

import numpy as np

 

t0  = -500; # Negative as t0 is an outflow

t1  = 30;

t2  = 50;

t3  = -10;

t4  = 20;

t5  = -5;

 

# All the cash flows as a Python list

cashFlows = [t0, t1, t2, t3, t4, t5];

 

# Calculate the Modified Internal Rate of Return

mirr = round(np.mirr(cashFlows, 5, 6), 4);

 

print("Modified Internal Rate of Return:%3.4f"%mirr);

 

Output:

Modified Internal Rate of Return:1.8209

 

 

 


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