In financial modeling, there are many financial ratios used to help determine the financial feasibility and profitability of a business or a project. One of the commonly used financial ratios is the Internal Rate of Return or also known as the IRR.
The internal rate of return or IRR is a very favorable financial ratio that is used to appraise the appeal of a business venture or a project. Many are reliant on this financial ratio which made it possible to calculate easier why utilizing MS Excel’s function that allows the calculation of IRR by merely adding the IRR formula. In MS Excel, there you can find two IRR formulas to use - IRR formula and the XIRR formula (also known as Extended Internal Rate of Return). Both helps with calculating the IRR but not exacltly the same. The difference among the two is the following: 1. IRR Formula – it is used to calculate the Internal Rate of Return with the assumption that each cash flow event occurs annually. 2. XIRR Formula – it is used to calculate the Internal Rate of Return with an assumption of series of cash flows that transpireat irregular intervals by specific time periods. Another difference from the IRR vs. XIRR is how the syntax of each formula function is written. To know further the difference and understand further about the IRR vs. XIRR, please read the full article: IRR vs XIRR Formulas in Excel. Once you try to apply each function in your financial model, you can tell that it is undeniable that the XIRR function provides a further accurate calculation of the IRR. Due to its consideration of the timing of the cash flows, XIRR Function can cover the different cash flows that is inputted. The only disadvantage to it is that this means that you need to collect or input more data with precision in mind such as the exact dates and value with no estimations. Otherwise, the accurateness of the resulting data will not be reliable. This doesn’t mean that the IRR function is not helpful. Since the IRR function is very straightforward and easy to calculate, most often prefers the use of it. It is also the best option for generic calculations where the assumption annual cash flow holds. IRR vs. XIRR, which function is better to use when calculating the IRR? You should be able to tell which one to use simply by determining the cash flows’ pattern. If you’re looking for financial model templates that include the calculation and apply the IRR or XIRR functions, you can download here: IRR Financial Model Templates. Download Financial Model Templates with IRR vs. XIRR When creating a financial model, it usually takes a lot of time, especially if you have the intention to include several financial ratios to calculate. To help you save time and resources, you can simply download ready-made financial model templates that include the calculation of IRR vs. XIRR. If you are looking for a platform where you can download financial model templates with IRR vs. XIRR functions applied, then you can try checking out eFinancialModels. This platform offers a wide range of industry-specific financial model templates and financial modeling assistance, as well as customization services. Financial modeling experts and consultants create templates with vast experience and know-how regarding different industries and financial modeling. Save your time from creating a financial model from scratch and start downloading a financial model template of your choosing instead, especially ones with IRR vs. XIRR calculation.
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January 2021
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