In relation to a fund/ a portfolio (also, private equity investments), it is the discount rate that equalizes the initial outflow (IO) and the terminal value (TV). The modified internal rate of return (MIRR) is the implied rate of return which equates these two values over time. The MIRR is calculated in two steps: 1) compounding the future cash flows of an investment/ a project to the end of its term using an assumed reinvestment rate to come up with a terminal value of the future cash flows (TVFCF), and 2) the implied rate of return which equates the two values (over time) is calculated.
The reinvestment rate is the cost of capital (for situations where capital rationing is not a constraint)- constituting the rate of return that investments/ projects with similar risks are expected to generate. The MIRR is, at times, used in capital budgeting to rank alternative investments, provided other factors held constant (e.g., size, risk, etc.)
In the application of an MIRR, two rates are used a finance rate (the cost of capital), and a reinvestment rate: the interest attained for cash investments. These rates are period-specific (for periods less than a year).
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