What's the difference between XIRR and IRR?

XIRR vs IRR: What's the Difference?

XIRR (Extended Internal Rate of Return) and IRR (Internal Rate of Return) are both financial metrics used to calculate the return on investment, but they differ in how they handle the timing of cash flows:

  • IRR assumes that all cash flows occur at regular intervals, such as monthly or annually, making it ideal for investments with periodic cash flows. It calculates the annualized rate of return that makes the net present value (NPV) of all cash flows (both positive and negative) from an investment equal to zero.
  • XIRR, on the other hand, is a more flexible version that can accommodate cash flows that occur at irregular intervals. It also calculates the annualized rate of return but allows for different periods between cash flows, providing a more accurate reflection of the return on investments with non-periodic cash flows.

While IRR is suitable for analyzing investments with regular cash flows, XIRR offers a more precise evaluation for investments where cash flows do not occur at fixed intervals.

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