IRR is more commonly used, but MIRR is more realistic. Here is when and why to use each one.
The reinvestment rate problem with IRR
IRR implicitly assumes that all positive cash flows can be reinvested at the IRR itself. If a project has a 35% IRR, it assumes you can reinvest each year's returns at 35% — which is usually impossible.
MIRR fixes this by separating the finance rate (cost of borrowing) from the reinvestment rate (your actual reinvestment opportunities).
When to use MIRR over IRR
- Multiple sign changes in cash flows — projects that require capital injections mid-way can produce multiple mathematically valid IRRs. MIRR always returns a single value.
- Comparing projects of different scale — MIRR is better when you need to compare a $500K project to a $5M project with different cash flow patterns.
- Sophisticated lenders or board members require it — PE firms and sophisticated investors often prefer MIRR for realistic return modelling.
When IRR is fine
For simple, conventional cash flow patterns (one initial outflow followed by inflows), IRR and MIRR give similar results and IRR is more widely understood.
Use the MIRR calculator to compute MIRR with your choice of finance and reinvestment rates.