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:
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# 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:
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Modified Internal Rate of Return:1.8209 |