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XXXX A Basic Overview of XIRR

XXXX XXXX XXXX, India



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A Basic Overview Of XIRR


FEB 2013




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Document No. Ver. Rev. :
Authorized by: Signature/:
Date:



XXXX A Basic Overview of XIRR
XXXX XXXX XXXX, India

Author(s): DEBARKA CHAKRABORTY (XXXXXX)

Date written (MM/DD/YY): 02/21/2013
Project Involved: XXXXXXX

Declaration: I hereby declare that this document is completely based on my
personal knowledge gathered from different sources including online media but
presented through self-made statements and examples. This document does not
contain any material that infringes the copyrights of any other individual or
organization to the best of our knowledge.

Target Readers: All, whoever interested to understand ones return on financial
investments
Keywords: Banking, Investments, XIRR, Rate of return

Prerequisite Knowledge: Basic mathematical knowledge of compound interest











XXXX A Basic Overview of XIRR
XXXX XXXX XXXX, India

CONTENTS

Introduction
Purpose of this document
Key Words
Description of the XIRR function
Rules to Remember
Explanation using examples
Attached Excel Workbook with Examples
Conclusion

















XXXX A Basic Overview of XIRR
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INTRODUCTION

All of us deal with cash, be it less or more. We also park our funds at different financial
instruments be it savings accounts, fixed deposits or market-linked avenues. So the rate of
return is a term of quite importance. The rate of return dictates our inclination for a
particular investment.
So, measurement of the return of a certain investment becomes essential. Here the concept
of rate of return and the MS Excel function called XIRR comes into picture. It provides an
easy way to calculate and measure your return on your investments.

Purpose of this Document

This document is meant to enable individuals to measure their return on investments on any
time-frame period.
A simple MS Excel function and its effective use can empower retail investors or any given
individual to measure his/her cash growth on any investment.

KEY WORDS

Before moving any further, it is necessary to familiarize the readers with certain keywords
which they might not be aware of. The knowledge of some financial terms is imperative for
the proper and effective understanding of this matter.

Those are listed as follows
CASH FLOW
NPV (Net Present Value)
Capital Budgeting
IRR (Internal Rate of Return)
XIRR (Extended Rate of Return)
CAGR (Compounded Annual Growth Rate)



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CASH FLOW
In simple terms, cash flow is simply the inflow and outflow of cash for an individual or a
managed company. It can be defined as a revenue or expense stream that changes
hands over a given period of time. Cash inflows and outflows usually arise from one of three
activities - financing, operations or investing. For a business firm, cash flow is essential to
generate growth. Companies with ample cash on hand are able to invest the cash back into
the business in order to generate more cash and profit.

NPV (Net Present Value)
NPV compares the value of a rupee today to the value of that same in the future, taking
inflation and returns into account. If the NPV of a prospective project is positive, it should
be accepted. However, if NPV is negative, the project should probably be rejected because
cash flows will also be negative.
It is defined in financial terms as the difference between the present value of cash inflows
and the present value of cash outflows. These cash flows are of the project/investment to
be done.
Simply, we can put NPV as the present value of the future cash flows.

Capital Budgeting
Capital budgeting (or investment appraisal) is the planning process used to determine
whether an organization's long term investments such as new machinery, replacement
machinery, new plants, new products, and research development projects are worth
pursuing. It is budget for major capital, or investment, expenditures.



IRR (Internal Rate of Return)
The internal rate of return (IRR) or economic rate of return (ERR) is a rate of return used in
capital budgeting to measure and compare the profitability of investments.
It is the interest rate at which the net present value of all cash flows (both inflow and
outflow) that would accrue from an investment equal to zero. IRR is the rate of growth a
project/investment is expected to generate.
IRR is used to evaluate the attractiveness of a project/investment. If the IRR of the
investment (or a companys project) exceeds the required rate of return, that project is
XXXX A Basic Overview of XIRR
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desirable; else if the IRR falls below the minimum required rate of return, the project needs
to be scrapped/rejected.
The term internal refers to the fact that its calculation does not incorporate environmental
factors such as the interest rate of inflation, forex rates, etc.,.


XIRR (Extended Rate of Return)
XIRR is very similar to IRR except some minor differences.
XIRR returns the internal rate of return for a schedule of cash flows (be it cash inflow or
cash outflow) that is not necessarily periodic. XIRR calculation is based on a 365 days per
year basis, ignoring leap years.
The calculation for IRR works fine for periodic cash flows (say each month frequency),
payments taking place at regular intervals, but for aperiodic cash flows, XIRR function is
needed.
The input argument in XIRR function contains the date of cash flow. These dates need not
be in a periodic form.

CAGR (Compounded Annual Growth Rate)
The compounded annual growth rate (CAGR) is the year-over-year growth rate of an
investment over a specified period of time. It provides the smoothed annualized gain of an
investment over a given time period.
The following formulae is used to evaluate the CAGR of any investment, where ending value
is the final amount after # no. of years and beginning value is the initial value of
investment.







Suppose an initial investment of Rs.1000 grows to Rs.1950 in 3 years, then the smoothed
annualized return on the investment is given by the above formula.
CAGR = (Ending Value / Beginning Value)^( 1 / # of years) - 1
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CAGR = [(1950/1000) ^0.33] - 1 = 0.2493 = 24.93%
CAGR basically smoothes the compounded return for the specified period of time. If the
initial amount would have grown by this CAGR it would have reached this final value in the
time span specified.
Thus, it is an effective financial tool for individuals to gauge their investment return on an
annual basis. A good CAGR return on investments is a positive measurement of the financial
health of the investor.


Description of the XIRR Function
Among the many useful arithmetic functions present in MS Excel, XIRR is a function of
special importance. It is a highly effective tool when comes to evaluate and measure the
return of investments which are effected at irregular intervals.
XIRR returns the internal rate of return for a series of cash flows which may be periodic or
may not be. On the other hand, IRR function only evaluates the rate of return for periodic
cash flows.
The syntax used for XIRR is
XIRR (cash values, dates of cash flows, guess for iteration)
Cash values are the amount of cash which is invested or withdrawn on a certain date.
Dates of cash flows refer to the corresponding dates when the cash flows are transacted.
Guess for iteration is an initial guess of the rate of return (preferably between 0 and 1).

Rules to Remember

There are a few important points to remember:
1. The first entry under the cash values column must have the earliest date.
2. Later entries may be in any order (so long as they don't have a date earlier than the
first entry).
3. Investments are entered as positive amounts and withdrawals as negative amounts.
4. The current/final portfolio is entered as a negative amount.
5. You make some initial guess at the correct answer (like 0.1, meaning 10%).This is
required for the iterative process to assume an initial value. Any other valid value
(above 0) would also yield the correct result.
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The return generated by XIRR is an annualized return (over the period defined by the
dates). Annualized return has been explained under CAGR.


Explanation using examples
Well, our explanation of the implementation of the XIRR function of MS Excel can be best
understood if we fathom the objective it serves.
Our objective is to evaluate the rate of return of a series of cash flows (both inflows and
outflows) which are made at irregular intervals over a span of time.

Let us consider the following scenarios.
Exhibit 1: Mr. X wants to know the rate of return of his investments for the past few years.
Refer to attached Excel Workbook.

Exhibit 2: Let us now see a model investment scenario, such as a simple endowment Life
Insurance policy bought by Mr. X. He pays Rs. 10000 half-yearly as premium for tenure of
21 years for a sum assured of Rs. 500000. The maturity amount is said to be Rs.
1000000.He wants to know how good his investment is by evaluating its rate of return.
Refer to attached Excel Workbook.

Exhibit 3: Let us visualize a typical Recurring Deposit Scheme offered by a Bank. A monthly
deposit of Rs. 5000 for a period of 2 years matures at Rs. 132000.
Refer to the attached Excel workbook for the rate of return.



Attached Excel Workbook with Examples

Book1.xlsx

Conclusion
This document is solely meant to empower the readers with the concept of rate of return
and the implementation of XIRR function. The examples used are totally fictitious and bears
no resemblance to any prevailing financial portfolio of any individual.
XXXX A Basic Overview of XIRR
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This document would enable readers to calculate the future rate of return of their financial
investments. Thus choosing between different investment decisions would get easier. This
would result in better capital returns and capital growth.
At the end of the day, its more money that one can generate.
So, use XIRR function and go happy investing!!!!