IRR vs XIRR

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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

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IRR vs XIRR Key Differences

  1. Cash Flows: This is one of the primary differences between these two functions. IRR 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.
  2. Accurate Result: Unless there is a standard cash flow XIRR 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 function or else you need to track dates and use XIRR function.

IRR vs XIRR Head to Head Comparison

ParticularsIRRXIRR
MeaningIRR 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 SyntaxIRR 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 argumentXIRR 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 RateIRR 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 FlowsWith 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 EvaluatorSince 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.

Example

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.

IRR vs XIRR Example 1

Using these investment details, we will calculate the ROI.

Ok, first we will calculate IRR percentage.

IRR vs XIRR Example 1-1

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.

Example 1-2

[Guess] is an inflation rate, so automatically it takes 10%, leave it.

IRR vs XIRR Example 1-3

So, the ROI for Mr X is 17.13%.

Now similarly open XIRR function.

IRR vs XIRR Example 1-4

For Values, the argument chooses cells from C2 to C6.

Example 1-5

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. read more, so choose the date range of cells from B2 to B6.

Example 1-6

As usual, leave the last argument.

IRR vs XIRR Example 1-7

With XIRR function, we have got more ROI percentage because, with this function, we have taken into consideration specific date scheduled cash flows.

Conclusion

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 –

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