Excel XIRR function to calculate IRR for non-periodic cash flows

This tutorial demonstrates how to use Excel's XIRR function to calculate the internal rate of return (IRR) for cash flows with irregular timing, and how to build a custom XIRR calculator. Determining IRR is crucial for capital-intensive decisions, allowing for comparison of projected returns across various investments and providing a quantitative basis for decision-making.

Unlike the simpler IRR function (which assumes equally-spaced cash flows), XIRR handles irregular intervals. This tutorial will guide you through its application.

Key Topics Covered:

• Excel's XIRR function
• XIRR calculation methodology
• Formula examples: basic XIRR, complete function form, and monthly cash flow calculations
• Creating an Excel XIRR template
• Comparing XIRR with IRR and XNPV
• Troubleshooting XIRR errors (#NUM!, #VALUE!)

The Excel XIRR Function

The XIRR function calculates the internal rate of return for a series of cash flows, regardless of whether they are periodic. Introduced in Excel 2007, it's available in all subsequent versions.

Syntax:

XIRR(values, dates, [guess])

• values: A range of cells representing cash inflows and outflows.
• dates: Dates corresponding to each cash flow. The initial investment date must be first.
• [guess]: (Optional) An estimated IRR (percentage or decimal). Defaults to 10% if omitted.

Example: =XIRR(A2:A5, B2:B5) calculates IRR for cash flows in A2:A5 and corresponding dates in B2:B5. Ensure the cell is formatted as a percentage for correct display.

Understanding XIRR Calculation

XIRR uses an iterative approach to solve the following equation:

Where:

• P = cash flow
• d = date
• i = period number
• n = total periods

Excel iterates until it finds a rate with 0.000001% accuracy, or returns a #NUM! error after 100 attempts.

XIRR Formula Examples

• Basic XIRR: A simple example demonstrating IRR calculation for a series of annual cash flows.

• Complete XIRR Function: Shows how to use the optional "guess" argument to aid calculation, especially helpful when encountering #NUM! errors.

• Monthly Cash Flows: XIRR always returns an annualized rate. To approximate a monthly rate, use the formula =(1 XIRR(range,dates))^(1/12)-1.

Creating an Excel XIRR Template

For efficient IRR calculations across multiple projects, create a dynamic XIRR calculator using named ranges (Cash_flows, Dates) and the OFFSET function. This allows for easy addition or removal of cash flows without modifying the formula.

XIRR vs. IRR

• IRR: Assumes equally-spaced cash flows.
• XIRR: Accommodates irregularly-spaced cash flows. Generally preferred when precise payment dates are known for greater accuracy.

and

XIRR and XNPV

XIRR and XNPV are related: XIRR finds the discount rate that makes XNPV equal to zero.

and

Troubleshooting XIRR Errors

• #NUM!: Check for mismatched ranges, insufficient positive/negative values, incorrect date order, or the need for a different guess.
• #VALUE!: Ensure all values are numeric and dates are valid Excel dates.

This comprehensive guide empowers you to effectively utilize Excel's XIRR function for accurate IRR calculations in various financial scenarios. A downloadable practice workbook is available for further learning.

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