Excel’s IRR and XIRR and simple but excellent tools to estimate the returns from a periodic investment in a volatile instruments (eg. Mutual fund SIP).
Unfortunately, two issues affect its usage:
- Bug(s) of unknown origin that make it give the wrong result sometimes.
Read more about this here: XIRR: A Bug? (Thanks to financial planner Hari, for sending me this link)
When the cash flow (receipts – payments) becomes small or negative, there are two possibilities
- XIRR or IRR gives only one of the many possible solutions
Read more about this here: IRR/XIRR – Excel – Limitations of Calculating Complex Cash Flow Returns
- XIRR or IRR simply gives an error
- A Youtube video sent by Hari, discusses these issues well: A look at Excel’s XIRR function You can read my discussion with the author of the video, if interested.
- For a slightly more technical account: Sins of IRR
Q: Can we check the results of IRR and XIRR, spot bug, understand errors and obtain all possible solutions (if they exist) for a given cash flow?
A: Yes you can! With this tool
The Excel IRR and XIRR cash flow returns analyzer
You should use this tool to validate your results if
- XIRR gives you an abnormally small or large value, if IRR gives you an abnormally large value
- The net cash flow (receipts – payments) is less than 1000
How it works
- Using the mathematical expressions behind Excel functions NPV and XNPV, the analyzer gives you a range between which a possible solution to IRR or XIRR exists. For example if the answer is 10%, the limits of the range will be say, 5% to 15%.
- This way all possible solutions ranges are determined.
- Then for a given range, the solution is calculated using Excel’s GoalSeek
- Using the GoalSeek result as a guess, the XIRR and IRR are calculated.
The analyzer allows you to check if results given by XIRR and IRR are unique and gives you the range between which all return solutions for a given cash flow exist.