I have been asked several times "What is the difference between the IRR and XIRR function in Excel?"

Simply - the IRR function returns the PERIOD INTEREST RATE ("i/n") for a stream of cash flows of equal time length (i.e. days, months, quarters, years, etc.). "i" is the "nominal" per annum interest rate and "n" is the number of compounding periods per year. For example, if the IRR function in Excel on a stream of monthly cash flows returns a result of 4.5% - then the "nominal" per annum internal rate of return is 54.0% (or .045 x 12 - "i" compounded monthly) and the effective per annum rate of return is 69.59% (compounded annually). To convert a nominal (per annum) IRR to an effective (per annum) IRR, you can use the "EFFECT" function in Excel or use the equation (1 + i/n)^n - 1.

Essentially - any cash flow stream (with only one change of sign) has two valid IRRs (the nominal IRR and the effective IRR).

The XIRR function return assumes DAILY COMPOUNDING.....period. The user has to input/designate a specific date each non-zero cash flow occurs and the cash flows can be irregular. All other cash flows are assumed to be zero. The XIRR function calculates an EFFECTIVE per annum rate of return (not a nominal period interest rate). You can convert the XIRR rate of return result by using the "NOMINAL" function in Excel and assuming n=365.