What is the difference between IRR and XIRR?

Interested in finance? Then you’ve probably come across the terms IRR and XIRR. But what exactly do they mean? In this blog post, we’ll explore the similarities and differences between these two important financial formulas so that you can make better informed decisions with your money.

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What Is IRR?

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First things first—what is IRR? Internal Rate of Return (IRR) is a metric used to measure the profitability of an investment over time. It calculates how long it takes for an initial investment to become profitable, based on cash flow projections. Generally speaking, investments with higher IRRs are considered more valuable than those with lower IRRs because they offer greater potential return.

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What Is XIRR?

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XIRR stands for Extended Internal Rate of Return and is very similar to regular IRR, but there are a few key differences. For one thing, XIRR allows you to take into account multiple cash flows at different points in time—unlike regular IRR which only looks at the beginning and the end of an investment period. Additionally, XIRR offers better accuracy when dealing with investments that have irregular cash flows (such as those that involve month-to-month payments).

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Differences Between The Two Formulas

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Although both formulas are used to measure the rate of return on an investment, there are some notable differences between them. XIRR offers more flexibility because it takes into account multiple cash flows at different points in time, whereas regular IRR does not. Additionally, XIRR provides better accuracy when dealing with investments with irregular cash flows due to its ability to handle non-uniform intervals between payments. Finally, while both formulas are relatively easy to use, they each require slightly different inputs—so make sure you’re using the right one for your situation!

In summary, while both the Internal Rate of Return (IRR) and Extended Internal Rate of Return (XIRR) can be used to measure the rate of return on an investment over time, there are some important differences between them. XIRR gives you more flexibility by taking into account multiple cash flows at different points in time and offers better accuracy when dealing with investments that have irregular cash flows. Be sure to choose the formula that best fits your needs when considering any new investments!

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