I am currently calculating internal rate of return (IRR) values for assorted
investments using Excel's XIRR function. For some investments distributions
have been reinvested, whereas for others distributions have been paid out as
income. Now I have repeatedly read that the IRR formula assumes that
distributions are reinvested, although one source suggests that the
assumption is merely that the opportunity for reinvestment exists. Several
personal financial investment programs that I have looked at (MS Money and
Quicken Personal Plus) clearly use the IRR formula to calculate annualised %
returns whether distributions are reinvested or not. My question is whether
it is appropriate to use the XIRR formula to calculate returns on investments
when distributions have been taken as income and not reinvested. I'd greatly
appreciate help on this.