XIRR
 

"W" wrote in message news:...
The XIRR function seems to want an array of values where the first element
is always negative, and the rest are positive. So I model a stock
purchase
and sale as the first number being negative, and the sale being positive.
But what about if you have a short sale of stock, where you receive funds
before you buy and pay funds? That makes the first cell of the value
array
positive. XIRR freaks out and gives a #NUM! result. Why can't XIRR deal
with a positive followed by negatives? It is weird to have to distort
every
financial transaction to make it look like something XIRR can work with.

Is there any third party software the implements an XIRR that is more
powerful and can take more realistic inputs?

Correction on this, what happens is I get a negative XIRR. If I have a
short sale like:

1/27/2012 2/3/2012
$52 -$50

XIRR tells me it is an annualized return of -87.1% (NEGATIVE return, even
though it is net positive cash)

If I reverse this:

1/27/2012 2/3/2012
-$50 $52

XIRR tells me it is 673% annualized return. But at least it is positive.

Why does XIRR have problems dealing with positive cash up front followed by
negative cash flows?

--
W

XIRR
 

Have you looked at alternatives in the List of Financial Functions in Excel help?
Possibly?... MIRR
--
Jim Cone
Portland, Oregon USA
http://www.mediafire.com/PrimitiveSoftware
(Calculate Payments XL add-in: amount, interest rate, payment, term - in the free folder)




"W"
wrote in message ...
"W" wrote in message news:...
The XIRR function seems to want an array of values where the first element
is always negative, and the rest are positive. So I model a stock
purchase
and sale as the first number being negative, and the sale being positive.
But what about if you have a short sale of stock, where you receive funds
before you buy and pay funds? That makes the first cell of the value
array
positive. XIRR freaks out and gives a #NUM! result. Why can't XIRR deal
with a positive followed by negatives? It is weird to have to distort
every
financial transaction to make it look like something XIRR can work with.

Is there any third party software the implements an XIRR that is more
powerful and can take more realistic inputs?

Correction on this, what happens is I get a negative XIRR. If I have a
short sale like:

1/27/2012 2/3/2012
$52 -$50

XIRR tells me it is an annualized return of -87.1% (NEGATIVE return, even
though it is net positive cash)

If I reverse this:

1/27/2012 2/3/2012
-$50 $52

XIRR tells me it is 673% annualized return. But at least it is positive.

Why does XIRR have problems dealing with positive cash up front followed by
negative cash flows?

--
W

XIRR
 

On Apr 4, 3:34*pm, "W" wrote:
"W" wrote in message news:...
Correction on this, what happens is I get a negative XIRR. * If Ihavea
short sale like:

1/27/2012 * * * * * * * *2/3/2012
$52 * * * * * * * * * * * * * *-$50

XIRR tells me it is an annualized return of -87.1% (NEGATIVE return, even
though it is net positive cash)

If I reverse this:

1/27/2012 * * * * * * * *2/3/2012
-$50 * * * * * * * * * * * * * *$52

XIRR tells me it is 673% annualized return. * But at least it is positive.

Why does XIRRhaveproblems dealing with positive cash up front followed by
negative cash flows?

--
W

XIRR function in Excel works as it suppose to, XIRR calculates
internal rate of return for irregular cash flows. To calculate IRR, it
uses net present value equation set to Zero. This also holds true for
calculation of internal rate of return using IRR Excel function

It doesn't have to be a net present value equation that is set to zero
to find IRR yet since most professors at business schools and most
text books define internal rate of return where NPV is zero thus most
software programs make use of NPV equation whilst finding IRR

The other equations that may be used for calculation of IRR include
net future value equation set to zero, profitability index equation
set to 1, or TVM equation set to 0 in case of uniform series of cash
flows

More about the usage of these 4 equations can be found here
http://finance.thinkanddone.com/irr.html

Now back to your sample cash flows, XIRR is producing the correct
internal rates of return at which both sample projects have an NPV of
ZERO

See the detailed solution for XIRR Calculation and subsequent NPV
calculation for your sample date below this line

CF DATE T
52 1/27/2012 0
-50 2/3/2012 7/365

IRR calculation

52 - 50(1+i)^(-7/365) = 0
- 50(1+i)^(-7/365) = -52
(1+i)^(-7/365) = 52/50
1/(1+i)^(7/365) = 52/50
(1+i)^(7/365) = 50/52
(1+i)^(0.0192) = 0.961538462
1+i = 0.961538462^(1/0.0192)
1+i = 0.12936983441424
i = 0.12936983441424 - 1
i = 0.12936983441424 - 1
i = -0.87063016558576
i = -87.06%

NPV Calculation

NPV = 52 - 50(1+i)^(-7/365)
NPV = 52 - 50(1-0.87063016558576)^(-7/365)
NPV = 52 - 50(0.12936983441424)^(-7/365)
NPV = 52 - 50/(0.12936983441424)^(7/365)
NPV = 52 - 50/(0.12936983441424)^(0.0192)
NPV = 52 - 50/0.961538461538462
NPV = 52 - 52
NPV = 0

CF DATE T
-50 1/27/2012 0
52 2/3/2012 7/365


IRR calculation

-50 + 52(1+i)^(-7/365) = 0
52(1+i)^(-7/365) = 50
(1+i)^(-7/365) = 50/52
1/(1+i)^(7/365) = 50/52
(1+i)^(7/365) = 52/50
(1+i)^(0.0192) = 1.04
1+i = 1.04^(1/0.0192)
1+i = 7.729777228
i = 7.729777228 - 1
i = 6.729777228
i = 672.98%

NPV Calculation

NPV = -50 + 52(1+i)^(-7/365)
NPV = -50 - 52(1+6.729777228)^(-7/365)
NPV = -50 - 52(7.729777228)^(-7/365)
NPV = -50 - 52/(7.729777228)^(7/365)
NPV = -50 - 52/1.04
NPV = -50 + 50
NPV = 0

XIRR
 

"W" wrote:
what about if you have a short sale of stock, where
you receive funds before you buy and pay funds?
[....]
Why can't XIRR deal with a positive followed by negatives?

It can. You are misinterpreting the reason why XIRR returns a negative IRR
in this case.

(By the way, I will use the terms XIRR and IRR interchangably. XIRR is
simply Excel's way of calculating the IRR when cash flows occur on irregular
dates.)


"W" wrote:
If I have a short sale like:
1/27/2012 2/3/2012
$52 -$50

XIRR tells me it is an annualized return of -87.1% (NEGATIVE
return, even though it is net positive cash)

And that is correct mathematically for the NPV formula that Excel uses to
calculate the (X)IRR.

The problem is that that definition of IRR is not appropriate for a short
sale. See the explanation below. But first....


"W" wrote:
If I reverse this:
1/27/2012 2/3/2012
-$50 $52

XIRR tells me it is 673% annualized return. But at least it is positive.

GIGO. That is not the "reverse" of the cash flows that model the short
sale. You had it right the first time.

-----

Returning to the original question....

The problem is: when IRR is computed using the NPV formula, the assumption
is that we have a profitable cash flow, ergo a positive IRR, when the sum of
the later cash flows is __greater__ than (minus) the initial cash flow.

That is a necessary mathematical requirement because, with a positive IRR,
the magnitudes of the later cash flows are reduced ("discounted"). If the
sum of the later cash flows were already less than the (minus) initial cash
flow, the sum of the discounted cash flows would be even smaller than the
(minus) initial cash flow. Ergo, the NPV could not be made zero with a
positive IRR.

But the point is: that assumption does not apply to short sales.

For a short sale to be profitable, the "sum of the later cash flows" (the
later purchase price less transaction costs) must be __less__ than (minus)
the initial sale proceeds (less transaction and margin costs).

So for short sales, the annualized IRR is (1 + (s-p)/s)^(365/days) - 1,
where "s" is the initial net sales proceeds, "p" is the later net purchase
proceeds, and "days" is the hold time.

For your example, that would be about 615.56% annualized IRR.

XIRR
 

PS.... I wrote:
So for short sales, the annualized IRR is (1 + (s-p)/s)^(365/days) - 1,
where "s" is the initial net sales proceeds, "p" is the later net purchase
proceeds, and "days" is the hold time.

For your example, that would be about 615.56% annualized IRR.

In case it is not obvious from the description, "s" and "p" are both
positive typically. That is, they are __not__ signed cash flows.

XIRR
 

PPS.... I wrote:
So for short sales, the annualized IRR is
(1 + (s-p)/s)^(365/days) - 1, where "s" is the initial
net sales proceeds, "p" is the later net purchase proceeds, and "days" is
the hold time. For your example,
that would be about 615.56% annualized IRR.

Needless to say, the __annualized__ IRR is misleading, IMHO.

I don't know what conventional practice is for short sellers. But IMHO, for
hold times of less than 1 year, I would use the simple rate, namely (s-p)/p
formatted as Percentage.

Granted, that does not take "time value" into account. But I think any
attempt to do so is misleading.

Consider your example, but with a hold time of 14 days. The annualized IRR
would be about 167.50%. Do you really __feel__ (subjectively) that the
"rate of return" is more than 3.5 times better when the hold time is only 7
days?