XIRR
Definition:
XIRR (Extended Internal Rate of Return) is a financial function used to calculate the internal rate of return for a series of cash flows that are not necessarily periodic. It is commonly used in financial modeling to evaluate investments with irregular cash flows, such as those found in mutual funds or Systematic Investment Plans (SIPs).
Detailed Information
XIRR is a powerful tool for calculating the internal rate of return for investments with non-periodic cash flows. It takes into account the exact timing and amounts of each transaction, providing a more accurate measure of investment performance compared to traditional IRR calculations. XIRR is particularly useful for evaluating investments with variable contributions, such as SIPs, where the amounts invested may change over time
Example
Suppose you invested in a mutual fund with the following cash flows:
| Date | Cash Flow |
|---|---|
| 1-Jan-08 | -10,000 |
| 1-Mar-08 | 2,750 |
| 30-Oct-08 | 4,250 |
| 15-Feb-09 | 3,250 |
| 1-Apr-09 | 2,750 |
To calculate the XIRR, you would use the formula:= XIRR(A3:A7, B3:B7, 0.1).
Where A3:A7 are the cash flows and B3:B7 are the corresponding dates. The result would be the internal rate of return for the investment, which can be used to evaluate its performance.
FAQ's
What is the difference between XIRR and IRR?
XIRR is used for non-periodic cash flows, while IRR is used for periodic cash flows. XIRR provides a more accurate measure of investment performance when cash flows are irregular
How does XIRR handle variable contributions?
XIRR can handle variable contributions by taking into account the exact timing and amounts of each transaction. This makes it particularly useful for evaluating investments with changing cash flows, such as SIPs.
What are the limitations of XIRR?
XIRR depends on accurate data and may not fully reflect market fluctuations. It should be used alongside other investment performance measures to get a complete picture of an investment’s health
How is XIRR calculated in Excel?
XIRR is calculated using an iterative technique that cycles through the calculation until the result is accurate within 0.000001%. The formula is =XIRR(values, dates, [guess]), where values are the cash flows, dates are the corresponding dates, and guess is an optional starting point for the calculation.
Conclusion
XIRR is a valuable tool for evaluating investments with non-periodic cash flows. By taking into account the exact timing and amounts of each transaction, XIRR provides a more accurate measure of investment performance compared to traditional IRR calculations.
