XIRR Function Issue

I am using the XIRR function in a financial model. I changed the depreciation life in the same model from 7 to 5 years and the XIRR returned a value 5% lower. It doesn't make sense because the NPV value is higher in scenario 2 but the XIRR shows the IRR as lower. Can you please explain why this is happening? Scenario 2 is receiving the cash flow sooner, which should increase the IRR. I have provided the scenarios below:

Scenario 1:

Cash Flows: Dates:
-862,593 10/11/17
68,841 4/12/18
90,241 4/12/19
62,313 4/12/20
43,841 4/12/21
30,893 4/12/22
18,883 4/12/23
17,186 4/12/24
7,803 4/12/25
0 4/12/26
0 4/12/27

Answer = -18%


Scenario 2:

Cash Flows: Dates:
-862,593 10/11/17
88,309 4/12/18
113,518 4/12/19
67,131 4/12/20
41,356 4/12/21
36,924 4/12/22
12,194 4/12/23
0 4/12/24
0 4/12/25
0 4/12/26
0 4/12/27

Answer: -23%

Can you upload sample workbook?
From your description, I'm not sure how you are using XIRR on each scenario.

XIRR calculates internal rate of return for Non Periodic cash flow.

If you want to compare the two example for the same time frame... use below.
EX: XIRR(C4:I6,C6:I6) compared with XIRR(C14:I14,C16:I16)
-23.94% vs. -22.52%
If you want to compare at last payment, use what you got.

At any rate, XIRR and XNPV (or IRR and NPV) are not directly related.
Rather, they are used in conjunction to analyse project profitability.

For more detail on IRR vs. NPV see...
http://www.investopedia.com/terms/i/irr.asp
http://www.investopedia.com/walkthro...roduction.aspx
http://maaw.info/IRRNPVandCostofCapital.htm

Originally Posted by Daniid03

I am using the XIRR function in a financial model. I changed the depreciation life in the same model from 7 to 5 years and the XIRR returned a value 5% lower. It doesn't make sense because the NPV value is higher in scenario 2 but the XIRR shows the IRR as lower. Can you please explain why this is happening?

I have a difficult time explaining "time value" in conceptual terms. I have to resort to numerical analysis to make sense of things.

Note that the IRR is the discount rate that causes the NPV to be zero. So the sum of the later discounted cash flows should equal the (oppositely signed) first cash flow.

Also note that the larger the discount rate, the smaller the discounted cash flow.

So if the larger IRR of Scenario #1 were applied to Scenario #2, the sum of the later discounted cash flows would be less than the (oppositely signed) first cash flow.