Modified Internal Rate Of Return - MIRR

See: Internal Rate of Return - IRR.

Companies use a figure called internal rate of return to determine which projects to pursue. It measures the amount a given investment (like a new product or a new store opening) will generate the most future profit relative to the amount of money invested. Given a choice between a few opportunities, companies (and people too, for that matter) should pick the one with the biggest IRR.

IRR can be a little simplistic though. It's like reading the plot summary on Wikipedia versus actually watching a movie. You might not get all the subtleties (or subtitles).

Modified internal rate of return provides a more nuanced picture. Specifically, the MIRR takes into account what happens to the cash flow generated by the project. It works kind of like compound interest...a form of calculation that takes the simple equation a step further by contemplating what happens to all that extra interest earnings.

With a usual IRR calculation, the money generated from a project just kind of floats away into the ether. The math doesn't consider those funds. MIRR, on the other hand, assumes that this cash gets invested back into the project.