Baldwin Rate of Return | MIRR

Joachim Kuczynski, 05 March 2021

Baldwin rate definition

The modified internal rate of return (MIRR), or Baldwin rate of return respectively, is an advancement of the internal rate of return (IRR). But also the MIRR can be misleading and can generate false investment decisions. The MIRR is defined as:

    \[MIRR=\sqrt[n]{\frac{\text{FV(contribution cash flows,WACC)}}{\text{PV(invest cash flows, financing rate)}}}-1\]

FV means the final value at the last considered period, PV stands for the present value.

Pitfalls of the Badwin rate

These points have to be considered carefully when applying the MIRR:

  • Cash flows in different countries, with different currencies, equity betas, tax rates, capital structure, etc. should be evaluated with specific risk-adjusted discount rates. In MIRR the project is profitable, if the rate of return is higher than the required WACC. But which WACC do we mean in projects with various differing cash flows ? No diversification of cash flows can be taken into account in MIRR. But that is crucial in evaluating international projects.
  • You need premises about the reinvestment rate of the contribution cash flows that affect the profitability of the project. These premises are not required in the (e)NPV concept. Hence you add an additional element of uncertainty in your calculation when using the MIRR, without any need.
  • Reinvesting contribution cash flows (numerator of the root) with the risk adjusted WACC means that the return of the project increases when the project risks and WACC increases. That cannot be true. In pinciple you should not use key figures that require assumptions about reinvestment return rates. You are evaluating a certain project and not of other unknown investment sources. In general you can discount all cash flows with its appropriate discount rate and capitalize it to the last period.
  • Does capitalizing (or rediscounting) a cash flow with a risk-adjusted discount rate to a future period make sense in general? I do not think so. To rediscount cash flows with a risk adjusted discount rate including a risk premium means that you are increasing the risk of the project. The project does not remain the same, because its risk increases. Only taking a riskless discount rate for reinvestments would not increase the risk of the project. The MIRR comes from a classical perspective with no risk adjustment of the discount rates. If you are using risk-adjusted discount rates, you are mixing two concepts that do not fit.
  • An additional positive cash flow must improve the profitability of the project. If you add an additional, small cash flow in an additional period n+1, the Baldwin rate can decrease. This is because the number of periods increases and the value of the root decreases. Cases that lead to wrong results are not acceptable for decision key figure.
  • If you have e.g. an after sales market with small positive cash flows, the Baldwin rate decreases by considering these cash flows in your calculation. This is because the number of periods increases and the n-th root decreases. Thus an after sales market cannot be implemented in your calculation.
  • You have to define clearly, which cash flow is in the numerator and which is in the denominator of the root. There is no clear and logic distinction. Thus you can find different definitions in literature. Anyway avoid to take balance sheet definitions of “investment”. Note that besides investments also fixed costs and leasing payments have to be discounted with a default free discount rate in general.
  • You cannot compare mutual exclusive investment projects, if the investments or the project periods are different.
  • You can also not evaluate investment projects with negative value contribution to the firm. But anyway such projects exist and have to be decided.
  • All cash flows should be considered as expected value of a probability distributions. The expected value of the Baldwin rate is not the Baldwin rate of the expected values of the cash flows.


The (e)NPV concept is much better than the MIRR or Baldwin Rate of Return. The (e)NPV does not have all the pitfalls mentioned above. Further you can also evaluate and compare value-loosing investment alternatives and do not need any premises about reinvestment rates. There are only disadvantage of the MIRR / Baldwin rate compared to the (e)NPV, try to avoid the application of MIRR / Baldwin rate.

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