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Many businesses use cash flows from several sources to fund other investments. These revenues don't always come in on a regular monthly or annual schedule so you can't use the IRR function to calculate internal rate of return. However, you can use the XIRR function to calculate the internal rate of return for cash flows that occur at irregular intervals. The XIRR function has three arguments. The first is the cash flows themselves, so we have those in cells B5 to B12.
The next are the dates when those cash flows occur and those are in cells C5 to C12. Now the third and final argument is your guess at the internal rate of return and I have it here in cells C2. Excel uses this as a basis for its calculations because it goes through iteration to find the internal rate of return for these cash flows. If you leave the guess argument blank, Excel guesses 10% and that's good in most cases. I just put it in here as 5% to give you a visual aid of what it would look like when we put it into the formula.
Okay, now I'm going to click back in cell C15 and create the XIRR function. So it's =xirr( and then the values are in cells B5 to B12, the dates of those cash flows are in C5 to C12, and then my guess at the internal rate of return is in cell C2. Type a right parenthesis to close out the formula. Everything looks good and press Tab. And when I do, I see that the internal rate of return is about 6 and a half percent.
Whenever you need to evaluate the internal rate of return of an investment for the cash flows occur at irregular intervals, use the XIRR function. If the cash flows occur at regular intervals, then you can use IRR.
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