Internal Rate of Return Understanding the Difference Between IRR, MIRR and FMRR

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Okay, then along came the financial management rate of return (or FMRR). Though it also provides two separate rates to deal with negative and positive money flows known as the "safe rate" and "reinvestment rate", FMRR takes it a step additional. The assumption here is that where possible, all future outflows are removed by using prior inflows. In different words, negative money flows are discounted again at the safe rate and are either reduced or eliminate by any positive money flow that it encounters. The remaining positive money flows are compounded forward at the reinvestment rate.

CF0 -10,000
CF1 -100,000
CF2 50,000
CF3 -60,000
CF4 50,000
CF5 249,300

CF0 -10,000
CF1 -100,000
CF2 50,000
CF3 -60,000
CF4 50,000
CF5 249,300

By applying a finance rate of 5% and a reinvestment rate of 10% here's the result using the same investment criteria as we did earlier.

By definition, inner rate of return is the discount rate at which the present value of all future money flows is exactly equal to the preliminary capital investment. To make the calculation, negative money flows are discounted at the same rate (i.e., the IRR) as positive money flows.

MIRR = 18.75%

Internal rate of return (IRR), modified inner rate of return (MIRR), and financial management rate of return (FMRR) are three returns used to measure the profitability of investment property. Each method arrives at a percentage rate based upon an preliminary investment amount and future money flows, and in each case (of course) the higher the better, but the procedure for making the calculation varies particularly as do the results.

We'll apply a safe rate of 5% and a reinvestment rate of 10% to our investment criteria to point out you the result. But this time we'll also contain a table to point out you the adjusted money flows.

CF0 -111,717
CF1 0
CF2 0
CF3 0
CF4 0
CF5 304,300

IRR = 30%

Seems all well and good, but the challenge here is that the calculation assumes that the money generated during an investment will be reinvested at the speed calculated by the IRR, which could be unrealistically high and therefore will overstate the return on preliminary investment. Likewise, since negative money flows are also discounted at the IRR, if that rate is fairly high, the investor could possibly no longer accurately estimate the money required to meet those future negative money flows.

FMRR = 22.19%

CF0 -10,000
CF1 -100,000
CF2 50,000
CF3 -60,000
CF4 50,000
CF5 249,300

The financial management rate of return is frustrating to compute, which is why most real estate investment software solutions opt for the modified inner rate of return (MIRR) calculation. But after learning about it from CCIM, I considered it a beneficial return for real estate investment analysis, so I included FMRR my ProAPOD real estate investment software as well as my ProAPOD mortgage calculator software. To learn more please visit the link provided below.

To deal with this shortcoming many real estate analysts use a method known as MIRR (i.e., modified inner rate of return). In this approach, the assumption is that positive money flows the investment generates during its lifestyles could be reinvested and earns interest at a "reinvestment rate", and negative money flows have to be financed at a "finance rate" during the lifestyles of the investment. In different words, instead of without problems using one rate (i.e., IRR) to deal with both negative and positive money flows, MIRR introduces the option to use two different rates.

Let's consider the subsequent investment with the preliminary investment as CF0 (consistently a negative number because it is money outflow) and subsequent money flows as CF1, CF2, etc., with some negative and some positive.