Using the XIRR Function

In other issues of ExcelTips you discover how you can use the IRR function to calculate the internal rate of return for a series of values. Excel provides another function, XIRR, that is closely related to IRR. The XIRR function is used to determine the internal rate of return when there are a number of irregular payments associated with an investment. The XIRR function is provided as part of the Analysis ToolPak add-in.

By definition, an internal rate of return is the interest rate accrued on an investment consisting of a series of payments and income that occur over the life of the investment. The XIRR function is used to determine the IRR when the payments and income are made at different periods. In the values provided to the function, you enter payments you make as negative values and income you receive as positive values.

For instance, let's say you are investing in your friend's business, and you are providing the money ($50,000) on November 1. Because of the seasonal nature of your friend's business, the payments are scheduled for March 1, April 1, May 1, June 1, July 1, and August 1 for each of three years. During the first year, payments will be $3,500 each, during the second year they will be $4,250 each, and during the third year they will be $5,000 each.

Since the $50,000 is money you are paying out, it is entered in Excel as a negative value. The other values are entered as positive values. For instance, you could enter –50000 in cell D4, 3500 in cells D5 through D10, 4250 in cells D11 through D16, and 5000 in cells D17 through D22. Similarly you would enter the dates of the payments in column C, just to the left of each exchange of money. To calculate the internal rate of return, you would use the following formula:

=XIRR(D4:D22,C4:C22)

The first range you specify with XIRR is the range of values (cash inflows and outflows) and the second range is the dates associated with those values. The function (in this instance) returns an internal rate of return of 31.2368%.

The ranges you use with the XIRR function must include at least one payment and one receipt. If you get a #NUM error, and you have included payments and receipts in the range, then Excel needs more information to calculate the IRR. Specifically, you need to provide a "starting guess" for Excel to work with. For example:

=XIRR(D4:D22,C4:C22,10%)

This usage means that the XIRR function starts calculating at 10%, and then recursively attempts to resolve the XIRR based on the values in the ranges.