Calculate the XIRR (extended internal rate of return) for a series of irregular cashflows

Frequently asked questions

 

What is the external internal rate of return (XIRR)?

The external internal rate of return (IRR) is the discount rate of a given series of irregular cashflows that take place such that their net present value is equal to 0. When evaluating potential investments or projects, XIRR tells us what the minimum threshold of an investment should be in order for it to be considered, e.g. if the XIRR defined by a person is 10%, then only investments which have an XIRR larger than 10% would be considered.

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The XIRR can be used to compute the returns on SIPs and other investments as it considers "when" these cashflows take place. If its a yearly SIP, IRR can be used accurately but it's a simplification, but when the periods are irregular, then IRR is not suitable as it conceals the real picture.

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When should I use XIRR?

In the financial sense, XIRR is useful to determine how profitable an investment (or a series of cashflows) is. IRR is used when the cashflows are unevenly spaced. The XIRR can only be calculated if at least one cashflow is negative. XIRR can also be used to assess lumpsum investments that pay out dividends at any point of time.

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When comparing investments, suppose an equally risky investment had a higher XIRR, then the investment with the higher XIRR would be a better choice. Similarly, if there were multiple investment options, and the investor decides to only consider those options which return at least 10%, then the IRR of each investment option would be evaluated and all those with an XIRR lower than 10% would be eliminated. 

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How is XIRR estimated?

The formula that can be used to estimate the XIRR along with an explanation of the  terms is provided above. This formula assumes at least one negative cashflow and at least one cashflows at any point of time.

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What is an example of XIRR?

Assume a series of cashflows as -100,000 | -50,000 | 200,000 on 01.01.2025, 15.09.2026 and 18.04.2027 respectively. The XIRR for such an investment would be 17.59%. If the last payment were to happen on 18.04.2030, then the XIRR would reduce to 6.25%. 

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Suppose the investor decided, that he would only invest if he gets an XIRR of at least 10%, then he would reject the investment example described above as it has an IRR of 7.09%. The reason is that an IRR of 7.09% implies a net present value (NPV) of 0 and a discount factor of 7.09%. If the discount factor that the investor works with is 10%, then the IRR of 7.09% would not be used while calculating the NPV. In this case the NPV of the investment would be -13,309.19 and this would, from the view point of the investor, be unacceptable or unprofitable.

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Note:

If an investment fulfills the XIRR and/or XNPV criteria, it does not automatically mean it is a good investment. If we compare investment option A and B below, we see that the XIRR is equal but investment A starts paying back returns sooner. If the risk of both investments is equal, then investors would usually prefer option A, unless there is a strong reason to defer returns, e.g. by going for option A, there may not be any other follow up investments with an XIRR of 10% or more. If an investor perceives the risk of A to be significantly larger than that of B, then selecting option B could make sense. Therefore, while comparing investments, it is important to look at other factors such as risk, the nature of the payouts, the breakeven point, liquidity constraints, liquidity requirements, investment objectives etc.

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Why is this XIRR calculator useful?

This XIRR calculator is useful as it can help with retirement planning or investment planning. It's also a good way for beginners and professionals alike to estimate the returns from a series of investments and to make better decisions.

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How do I use this XIRR calculator?

Instructions to use this IRR calculator are provided above.