Here we establish how to calculate the modified internal rate of return. The modified internal rate of return incorporates a reinvestment rate into the standard IRR calculation addressing some of its shortcomings. As a consequence, our analysis should be consistent with the NPV when comparing the two investments. Essentially, we are calculating the compound annual growth rate of the investment, and in order to do so, we need a cash inflow and we need a cash outflow. To achieve this, we need to discount all the future cash flows to their present value using the discount rate. Once we have this single number, we compound it up to the final year of the investment using our reinvestment rate, which could differ from the discount rate. Now we have an initial year zero investment and a final year future value. We can calculate the compound annual growth rate, which is essentially a modified internal rate of return. If you think about it, we have one year zero cash outflow and one final year cash inflow, so we've basically turned the investment into a zero coupon bond.