IRR formula for monthly cash flows

[Guest]

What is the best formula to use when calculating an IRR for monthly cash flows?

XIRR? or ((1+IRR(range,-0.01))^12)-1 ? or can just IRR be used?

Thank you

 

[Niek Otten]

Just IRR will do.
You should realize that you get a monthly rate for monthly cash flows.

--
Kind regards,

Niek Otten

| What is the best formula to use when calculating an IRR for monthly cash flows?
|
| XIRR? or ((1+IRR(range,-0.01))^12)-1 ? or can just IRR be used?
|
| Thank you

 

[Guest]

What is the best formula to use when calculating an IRR for
monthly cash flows? XIRR? or ((1+IRR(range,-0.01))^12)-1 ?
or can just IRR be used?

IRR will compute a monthly rate. Ostensibly, your middle formula
annualizes the monthly rate. However, academic papers that
I have seen simply compute 12*IRR(...). Personally, I think your
formula is more correct.

XIRR does compute an annual rate. But it requires actual dates,
which might be more data than you have or want to specify.
Moreover, since XIRR counts actual days (1-Feb is 28 or 29 days
before 1-Mar), the result is not exactly the same as your middle
formula would return, although that might be your intent. On the
other hand, I hasten to point out that XIRR's method of
annualization is effectively the same as yours. Screw academia! ;-)

 

[Fred Smith]

Use IRR if your cash flows are regular (ie, every month). Use XIRR if they are
irregular.