What do you do when you need to calculate the internal rate of return (IRR) for an investment in your company? Do you spend hours staring at a spreadsheet with complex formulas and equations trying to make sense of it all?
Well, today, I’m going to show you how to use Google Sheets’ XIRR formula and make calculating IRR a breeze. It’s a powerful tool that will not only save you time but also help you make better business decisions.
The XIRR formula is a Google Sheets function that calculates the internal rate of return for a range of cash flows that may not be scheduled at regular intervals. It takes into account both the timing and amount of cash flows, making it an essential tool for any business looking to make informed investment decisions.
By using the XIRR formula, you can quickly and easily determine the profitability of an investment, taking into account the time value of money. This means that you’re not just looking at the raw numbers but rather evaluating the profitability of an investment over the long-term.
Using the XIRR formula in Google Sheets is a straightforward process. First, you’ll need to create a table that contains the cash flows for the investment you want to evaluate. The table should have two columns:
Once you have created your table, you can use the XIRR function to calculate the internal rate of return for the investment.
The syntax for the XIRR function is as follows:
For example, if you had an investment that had the following cash flows:
| Cash Flow Amount | Date |
|---|---|
| -1000 | 1/1/2020 |
| 500 | 6/30/2020 |
| 600 | 12/31/2020 |
| 800 | 6/30/2021 |
| 1000 | 12/31/2021 |
You could use the following XIRR function to calculate the internal rate of return for this investment:
Google Sheets would return an answer of 20.42%, indicating that this investment is profitable with an internal rate of return of over 20%.
While the basic XIRR formula is easy to use, there are some more advanced techniques that you can use to get even more out of this powerful tool.
The XNPV formula in Google Sheets is used to calculate the net present value of a set of cash flows based on a specified discount rate. When used in combination with the XIRR formula, it can help you adjust for risk and better evaluate potential investments.
For example, suppose you had two different investments with the following cash flows:
| Cash Flow Amount | Date |
|---|---|
| -1000 | 1/1/2020 |
| 500 | 6/30/2020 |
| 600 | 12/31/2020 |
| 800 | 6/30/2021 |
| 1000 | 12/31/2021 |
The first investment has a low level of risk, while the second investment has a much higher level of risk. To better evaluate these investments, you could use the XNPV formula to adjust for risk at different discount rates:
By comparing the net present value of each investment at different discount rates, you can evaluate which investment has a better risk-adjusted return.
One of the limitations of the basic XIRR formula is that it only works for cash flows that occur at irregular intervals. However, if you have a set of regular monthly cash flows, you can use the EOMONTH function in combination with the XIRR formula to calculate the internal rate of return for the investment.
The EOMONTH function in Google Sheets returns the last day of the month for a given date. By combining this function with the XIRR formula, you can calculate the internal rate of return for an investment with monthly cash flows:
This formula would calculate the internal rate of return for an investment with monthly cash flows over a one-year period.
If you’re serious about making informed investment decisions for your business, then understanding the XIRR formula in Google Sheets is an absolute must. Not only does it save you time, but it also helps you make better decisions by evaluating the profitability of an investment over the long-term.
So go ahead and give the XIRR formula a try. You’ll be amazed at how easy it is to use, and you’ll wonder how you ever made investment decisions without it.
