GIPS - Question, How MIRR is different from IRR

Study Session 18, Schweser Book 5 page 185 They both appear to be same to me.

I don t have Schewser books in front of me but MWRR is IRR I guess

The difference is that with MIRR you specifically consider the timing of each cash flow. With traditionall IRR always have the same range between the cash flows.


CFAI volume 6 page 131 has IRR formula, cool

example on the bottom calculates IRR to be 0.0009536 daily, or 2.9 per month

use the numbers in that same example and apply the formula for the so called modified IRR on page 286, the same answer satisfied the formula, 2.9

really not seeing the differece bettwen the two

MIRR weights the cash flows by how long they are in the period. IRR does not.

do we need to calculate this in the exam guys?

Yeah I think MIRR is just like the XIRR function in Excel. Which would be very hard to calculate. Focus on low hanging fruit and practice questions on GIPS. It’s a small %. Do a whole bunch of practice questions, and be done with it. No use re-reading really IMO. Make sure you kow how to do the real estate calcs and Modified Deitz method though…

reallllly doubt it. IRR is an iterative process, so without a computer, gl. Then again if its MC i guess you could plug in each answer and see if it right…

The only way I see it showing up is if the cash flows are assumed to be in the middle of each month. In that case, I believe you can use the CF functions on the calc and solve for IRR. But I wouldnt spend time on this over other things more likely to show up GIPS, like Capital Employed and Real Estate returns.

I have posted a series of steps to calc M/IRR, but now I forgot the details. With HP12C, Nj is needed to calc IRR.

The formula for MIRR and IRR are almost the same, except for one nuance: the interval.

IRR is usually an annual return, while the R in MIRR is usually monthly and SHOULD NOT be annualized. MIRR is an approximation for calculating monthly return since it doesn’t require the daily valuation for all the cash flows. I don’t think it’s a valid method after 2010.

In IRR, n is time periods that is distant from present (year 0). But in MIRR W is the distance from end date. So they give two different answers.

In other words in IRR, (right hand side) RHS is begining value, wherease in MIRR RHS is the ending value.

here is the difference between MIRR and IRR.

IRR is effectively the rate of return where NPV = 0 on a set of cash flows. It is the iterative rate of return earned on a project or investment. This IRR calc also means that cash flows in the middle periods are re-invested at the same R. Which is why it is an iterative process. Think MWRR from your GIPS section.

MIRR is different from IRR, in that it considers that interim cash flows may not be reinvested at the same singular R, as in the IRR calc. For example, let’s say you have a corporation which has an *amazing* project that will generate cash flows of $50,000 per year for 5 years, for only $35,000 upfront investment. The IRR is outrageous, but the interim $50k earned between now and the 5 year CANNOT BE REINVESTED at the same amazing R, because it is a one-off opportunity. Maybe it can only be reinvested at the company’s nominal cost of capital (often a base case). Think back to the Cash & Carry model for a commodity. Different cash flows are really being valued at different rates. You have interim cash flows like storage (being marked forward at Rf), while you have the final Futures Value, which could be valued at a different R (rate of return) because there is an arbitrage opportunity and the Rf isn’t applicable. The sum total of Cash flows in the FV (in flows and outflows at FV) vs. the initial PV (upfront cost) is weighed against one another and an MIRR (geometric rate of return that takes into account different cash flows happening at different iterative Rates) addresses them all.

if this is too complicated to understand, it’s because it’s hard to understand without seeing an example in Excel or on paper. google around MIRR, there are some youtube examples.

IRR is about discounting cash flow, while MIRR is about compunding the rate of return. Two different directions.

Thank you guys.

I don’t know it for sure but I guess those with ba2 professional have the MIRR built in. Because that was one difference I remember while I purchased the basic ba2plus. So do you all think it can show up? I guess not. Because those with basic calculators would be disadvantaged.

This is corporate finance MIRR explanation. in GIPS same rate ® is assumed. i.e. we solve for that r.

No one answered the point regarding why the two formulas can be satisified by the same solution :frowning:

As noted above, you would just plug in the each of the options to find the value through trial and error. This would not be difficult in a multiple choice format which I am guessing is the only place it would be asked due to the difficulty of calculating without a pc.

The questions end up with comparing three formula: IRR, MWRR, and MIRR. MWRR and MIRR look like the same. The difference is on their purposes. MWRR and MIRR formula can be derived from IRR formula, vice versa. R in IRR is a discount rate, while r in other two are reinvestment rate.

By the way, R in MWRR(p131) is a daily return; r in MIRR(p286) is a monthly return. Notice the Cash flow weight wj in MIRR calculation.