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The XIRR function in Excel calculates compound annual growth rate (CAGR) for investments with irregular cash flows. It is used when analyzing returns over multiple years, comparing different asset classes, or investments that include non-annual payouts like dividends. The example demonstrates using XIRR to calculate a 10.66% CAGR for an investment held from 2016 to 2020, and adjusting the calculation to 11.61% CAGR when also including annual dividends received. XIRR allows for accurate CAGR measurement of investments with compound, rather than simple, returns.

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33 views

Transcript Lyst8970 PDF

The XIRR function in Excel calculates compound annual growth rate (CAGR) for investments with irregular cash flows. It is used when analyzing returns over multiple years, comparing different asset classes, or investments that include non-annual payouts like dividends. The example demonstrates using XIRR to calculate a 10.66% CAGR for an investment held from 2016 to 2020, and adjusting the calculation to 11.61% CAGR when also including annual dividends received. XIRR allows for accurate CAGR measurement of investments with compound, rather than simple, returns.

Uploaded by

Gawri Meenu
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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XIRR function (TRANSCRIPT)

XIRR function is a financial function used in MS-Excel to compute compound annual growth rate of
investments. It is one of the widely used formulas in the investing world.

We will take an example to understand the application of XIRR function

Example: Assuming that Mr. X invested a Rs. 100 in a stock at the beginning of 2016, now at the
beginning of 2020 he sells those shares at Rs.150 thus, to calculate the CAGR or Compounded annual
growth rate we will use XIRR function.

=XIRR (-100,150, Dates*100) in Excel and we get that CAGR as 10.66%.

Note: The reason for putting "-" sign against 100 is because it is an outflow for an investor.

Now if we were to consider this in simplicity Mr X made a profit of Rs.50, which when we divide by
the holding period i.e. 4 years, we get 12.5% annualised returns. Our investments did not grow on
simple interest, thus the accurate measurement is CAGR, which works on compound interest.

When should we use XIRR function?

XIRR function is used when:

1. We compute the returns for more than one year


2. We compare returns of different asset classes.
3. There are multiple irregular cash flows such as dividends/interest

Taking it forward if in the earlier example we had dividend payments in between then also the XIRR
function can be used as it has the ability to treat multiple cash flows. Now, the CAGR calculated
would slightly be higher because the investor is receiving periodic cash inflows in the form of
dividends. Thus, CAGR is 11.61% inclusive of dividends.

Now here, the only difference in the calculation using XIRR function is that we have to list all cash
inflows including dividends and payout along with corresponding dates and then apply XIRR
function.

In this example, Company ABC declares annual dividend on 30th of June every year.

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