Difference Between IRR vs XIRR
IRR function calculates the Internal Rate of Return on the cash flows after taking into consideration the discount rate and helps evaluate the return on investment over a period of time. On the other hand, XIRR function is the extended internal rate of return that takes into account not only the cash flows and discount rates but also the corresponding dates to accurately measure the return.
IRR vs XIRR Infographics
IRR vs XIRR Key Differences
- Cash Flows: This is one of the primary differences between these two functions. IRRIRRInternal rate of return (IRR) is the discount rate that sets the net present value of all future cash flow from a project to zero. It compares and selects the best project, wherein a project with an IRR over and above the minimum acceptable return (hurdle rate) is selected. doesn’t understand when the actual cash flow happens, so assumes it as a year period, but with XIRR function it takes into consideration dates when actually cash flow happens.
- Accurate Result: Unless there is a standard cash flow XIRRXIRRThe XIRR function, also known as the Extended Internal Rate of Return function in Excel, is used to calculate returns based on multiple investments made for a series of non-periodic cash flows. is always the best option to evaluate an investment, so if your cash flows are happening at any specific date then you can rely on IRR functionIRR FunctionThe internal rate of return, or IRR, calculates the profit generated by a financial investment. IRR is a built-in function in Excel that calculates the IRR using a range of values as an input and an estimate value as the second input. or else you need to track dates and use XIRR function.
IRR vs XIRR Head to Head Comparison
|Meaning||IRR is the basic version of calculating ROI for an investment for a series of cash flows.||XIRR is the improved version of IRR where XIRR considers scheduled series of cash flows.|
|Formula Syntax||IRR has only two parameters, one is Values and another one is Guess. Off these two parameters Values is mandatory argument and Guess is an optional argument||XIRR has three parameters, the first one is Values, the second one is Dates and the last one is Guess. Of these three parameters, Values & Dates are mandatory arguments, and Guess is an optional argument.|
|Inflation Rate||IRR takes into consideration of inflation rate with its Guess argument, by default it takes 10% (0.1) as the inflation rate. However, the user can give their own rate of inflation.||XIRR too takes into consideration of inflation rate with its Guess argument, by default it takes 10% (0.1) as the inflation rate. However, the user can give their own rate of inflation.|
|Cash Flows||With IRR we don’t really mention the specific date of cash inflow or outflows.||With XIRR we provide what are the dates for cash outflow and inflow, so this is where XIRR is better than the IRR function because it takes into consideration of scheduled cash flows.|
|Better Evaluator||Since IRR doesn’t consider dates of cash flows you may not get accurate details unless cash flows are at the same periods.||XIRR considers dates of cash flows, so the time period of cash flows is treated accurately to get the accurate internal rate of return.|
Let us show you an example to demonstrate the differences between these two functions. Ok, first we will calculate IRR function.
Mr A has invested some money in one of the projects, and below are the details we have for his investment.
Using these investment details, we will calculate the ROI.
Ok, first we will calculate IRR percentage.
The first argument of IRR function is to select the values, i.e. what are the cash inflows and outflows, so select the range of cells from C2 to C6.
[Guess] is an inflation rateInflation RateThe rate of inflation formula helps understand how much the price of goods and services in an economy has increased in a year. It is calculated by dividing the difference between two Consumer Price Indexes(CPI) by previous CPI and multiplying it by 100., so automatically it takes 10%, leave it.
So, the ROI for Mr X is 17.13%.
Now similarly open XIRR function.
For Values, the argument chooses cells from C2 to C6.
This is where the XIRR function is different from IRR function, and the second argument is Dates, i.e. what are the dates for cash flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. , so choose the date range of cells from B2 to B6.
As usual, leave the last argument.
With XIRR function, we have got more ROI percentage because, with this function, we have taken into consideration specific date scheduled cash flows.
Our conclusion is if you really want to know the internal rate of return you must have dates for each of your cash flows because this is where our time period will be considered and an accurate ROI percentage can arrive.
So, XIRR is a better option than the IRR function.
This has been a guide to XIRR vs IRR. Here we discuss the top difference between IRR and XIRR Function in excel along with infographics and comparison table. You may also have a look at the following articles –