clarification regarding irr and xirr

[Guest]

I had tried working out the irr of a irregular cash flow using irr (day
based) and xirr. But I find that the irr given in both the working differ by
more than 4%. Please confirm which is correct in the above circumstances.

 

[Ron Rosenfeld]

I had tried working out the irr of a irregular cash flow using irr (day
based) and xirr. But I find that the irr given in both the working differ by
more than 4%. Please confirm which is correct in the above circumstances.

Which is correct depends on what you are trying to calculate.

With so little information as you provide in this isolated paragraph, it is not
possible to tell.

IRR and XIRR are calculating two different things. In some instances they will
give the same result, and in others they will not.


--ron

 

[Paul Corrado]

Both do calculate the same thing. They however do so for different types of
cash flow data.

IRR assumes evenly spaced cash flows and returns the rate of return for the
period used. (Which can then be annualized) If your cash flows are not
evenly spaced, the result is meaningless. You can however insert 0's into
the cash flow stream to overcome this issue.

XIRR returns an annual rate of return and adjusts for unevenly timed cash
flows.

Getting the rates to agree however requires that you are precise when
annualizing the returns. Using XIRR on the following cash flow stream,
which is spaced at 30-day intervals will return a rate of 12.87%. Using IRR
the rate is 1.00%, which can be annualized to 12.87% using the equation
(1+.01)^(365/30)-1

1/1/01 (100)
1/31/01 1
3/2/01 1
4/1/01 101

HTH

PC

 

[Ron Rosenfeld]

Both do calculate the same thing. They however do so for different types of
cash flow data.

If I were in the mood, I would argue over the definition of "same".

But your summary of the issues is on-point.


--ron