When it comes to evaluating investments, Australians are spoiled for choice in 2025. But while the classic Internal Rate of Return (IRR) remains popular, more finance-savvy investors and business owners are turning to the Modified Internal Rate of Return (MIRR) for a clearer, more realistic perspective. In a landscape where interest rates, government incentives, and capital costs are shifting, MIRR is fast becoming an essential tool in the Australian financial toolkit.
For years, IRR was the go-to metric for weighing up projects, especially in sectors like property, renewables, and business expansion. But IRR’s biggest flaw? It assumes all interim cash flows can be reinvested at the same high rate as the project’s return—a scenario rarely seen in the real world. Enter MIRR, which lets you input a realistic reinvestment rate (often your actual cost of capital or a market benchmark) and a finance rate for project outlays.
Let’s break down MIRR’s appeal with a practical example. Suppose a Sydney-based SME is considering a $500,000 solar upgrade. The project promises annual savings and government incentives, but also involves upfront financing at 7% and realistic reinvestment opportunities at 4%—in line with 2025’s term deposit rates.
This approach acknowledges the true opportunity cost and actual earning potential, not just theoretical returns. For investment committees and finance managers juggling multiple projects in 2025’s competitive market, this realism can make all the difference.
1. Property Development in Melbourne: A developer compares two projects: one with steady rental yields, the other with volatile sales proceeds. IRR suggests the riskier project is better, but MIRR—using conservative reinvestment rates—reveals the steady income is actually superior for long-term returns.
2. Renewable Energy Investment: With the Australian government’s 2025 Clean Energy Finance Corporation (CEFC) incentives, many businesses face upfront costs offset by long-term savings. MIRR factors in low-risk reinvestment rates and the cost of green loans, clarifying which projects deliver true value beyond the headline IRR.
3. Small Business Expansion: As business lending rates fluctuate post-pandemic, SMEs can use MIRR to compare funding options and determine which expansion project aligns with their real borrowing and reinvestment environment.
MIRR calculations aren’t just for big corporations. Most spreadsheet software (including the latest versions of Excel and Google Sheets) features built-in MIRR functions—simply plug in your projected cash flows, finance rate, and reinvestment rate. For larger projects, consider financial modelling software or consulting a commercial analyst to ensure your inputs reflect 2025’s economic realities.