XIRR Calculator
XIRR (Extended Internal Rate of Return) Calculator
What is XIRR?
Extended Internal Rate of Return (XIRR) is a method used to calculate the annualized rate of return for a series of cash flows that occur at irregular intervals. It is a more accurate measure compared to the standard IRR, which assumes evenly spaced cash flows.
How is XIRR Calculated?
XIRR is calculated using the Newton-Raphson method, which iteratively finds the rate that sets the present value of cash flows to zero. The formula for XIRR is as follows:
XIRR = (Expected Return - Risk-Free Rate) / Investment Risk
For example, if an investment has an amount invested of ₹1,00,000, an amount at maturity of ₹1,50,000, and a time period of 5 years, the XIRR calculation can be done as follows:
Total Return = ((₹1,50,000 / ₹1,00,000) - 1) * 100 = 50%
Using the Newton-Raphson method, the XIRR is calculated by iteratively finding the rate that sets the present value of cash flows to zero.
Benefits of XIRR Calculation
- Accurate Returns: Provides a more accurate measure of annualized returns for investments with irregular cash flows.
- Performance Evaluation: Helps investors evaluate the performance of their investments over time.
- Comparison: Enables investors to compare the returns of different investments more effectively.
- Decision Making: Assists investors in making informed investment decisions based on accurate return calculations.
Example Calculation
Using the formula:
XIRR = (Expected Return - Risk-Free Rate) / Investment Risk
Let's take an example to illustrate:
- Amount Invested: ₹1,00,000
- Amount at Maturity: ₹1,50,000
- Time Period: 5 years
Using the formula and provided details, the XIRR calculation helps investors understand the annualized rate of return for their investment.
FAQs
What is XIRR?
XIRR (Extended Internal Rate of Return) is a method used to calculate the annualized rate of return for a series of cash flows that occur at irregular intervals.
How is XIRR different from IRR?
While IRR assumes evenly spaced cash flows, XIRR accounts for cash flows that occur at irregular intervals, providing a more accurate measure of returns.
What is the Newton-Raphson method?
The Newton-Raphson method is an iterative numerical technique used to find the roots of a real-valued function. It is used to calculate XIRR by finding the rate that sets the present value of cash flows to zero.
Why is XIRR important for investors?
XIRR is important because it provides a more accurate measure of annualized returns for investments with irregular cash flows, helping investors make informed decisions and evaluate investment performance.
Can XIRR be used for all types of investments?
XIRR is particularly useful for investments with irregular cash flows, such as real estate or private equity. It can also be used for mutual funds, SIPs, and other investment vehicles with irregular cash flows.
**Disclaimer:** This financial calculator is provided for illustrative purposes only. The calculations are based on assumptions and estimates, and actual results may vary. The calculator does not constitute financial advice and should not be solely relied upon for making financial decisions. Users are advised to consult with a financial advisor for personalized advice.
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