The internal rate of return can make an investment appear more lucrative than it is; for investments expected to generate a lot of cash the internal rate of return can then overstate the benefits. The internal rate of return can also produce multiple results; a new solution will appear each time when the cash flow changes from positive to negative and from negative to positive. Additional solutions are not the best way to help financial counselors or executives choose the best solution for their or their client’s investment.

Some financial consultants are avoiding internal rate of return; but the idea is very popular and people continue to use internal rate of return. Excel offers an IRR function, but there is also a modified internal rate of return function (MIRR). MIRR form is =MIRR(values, finance-rate, reinvest-rate). The "values" is the same as the IRR values argument. It is a multitude of Excel cells referring to cash flow for each that the function will calculate. The "finance-rate" is a=the annual interest rate that will be paid to cover the negative cash flow during the initial phase. The "reinvest-rate" is the interest rate that the investor will earn.

There is no magic Excel function to solve investment problems but MIRR has a amazing logic that is easy to understand. You must find the present value of negative cash flow. You must know the negative value that corresponds to each investment year and then discount them at the finance rate. The reinvestment rate represents the future value of positive cash flow in every year during the investment time period. Find the average interest rate. MIRR also uses other financial measures: the profitability index and the financial management rate of return. The profitability index (PI) is the actual value of future cash flows divided by your investments. The financial management rate of return (FMRR) is similar to MIRR and is successfully used by real estate investors.

An average year to year return is calculated using the first investment amount and the future wealth dollar amount for each year. MIRR calculations provide a more accurate average return estimate then IRR because the user provides the interest rate and the rate of return to run the cash flow. The internal rate of return can generate over estimations on the return of the investment.

Usually financial specialists calculate the internal rate of returns as well as the modified rate of return, because the IRR can dramatically exaggerate the average return of the investment. When the investment is really important, an accurate financial report is vital. MIRR has a unique disadvantage; it cannot rank mutually exclusive investment proposals. MIRR is calculated determining the net future value (NFV) and the NVP and avoids the drawbacks of the popular IRR; it eliminates the sign change and the reinvestment option.