Commonly Confused Terms: IRR Versus XIRR

#Finance #CommonlyConfusedTerms

Photo by yan on Unsplash

IRR (Internal Rate of Return) and XIRR (Extended Internal Rate of Return) are both methods used to evaluate the viability and returns of an investment.

• IRR:

  • IRR is calculated by finding the discount rate that results in a net present value (NPV) of zero for a series of cash flows. It is commonly used for projects or investments where cash flows occur at regular intervals.

• XIRR:

  • XIRR is an extension of IRR and is used when cash flows occur at irregular intervals. It takes into account the exact timing of each cash flow, which can result in a more accurate calculation of the return rate for investments with irregular cash flows.

Hence, if the cash flows are regular and occur at equal intervals, both IRR and XIRR should give the same return rate. However, if the cash flows are irregular, XIRR may provide a more accurate measure of the return rate.