The Compound Annual Growth Rate (CAGR) is a widely used metric that helps investors, business owners, and analysts measure the average annual growth of an investment over a specific period, assuming the growth is compounded each year. Understanding how to calculate CAGR in Excel is essential for comparing investments, tracking business performance, and making informed financial decisions.

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What Is CAGR?

CAGR stands for Compound Annual Growth Rate. It represents the mean annual growth rate of an investment as if it had grown at a steady rate, smoothing out the effects of volatility or irregular returns over multiple periods. This makes it ideal for comparing the performance of different investments or business metrics over time.

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Basic CAGR Formula

The mathematical formula for CAGR is:

$$
\text{CAGR} = \left(\frac{\text{Ending Value}}{\text{Beginning Value}}\right)^{\frac{1}{n}} – 1
$$

Where:

• Ending Value: The value at the end of the period
• Beginning Value: The value at the start of the period
• n: Number of years (or periods)

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How to Calculate CAGR in Excel

There are several ways to calculate CAGR in Excel. Here are the most common methods:

1. Direct Formula Method

Suppose your initial investment value is in cell A1, the final value is in A2, and the number of years is in A3. Enter the following formula in another cell:

=(A2/A1)^(1/A3)-1

Format the result as a percentage to display the CAGR clearly.

2. Using the POWER Function

You can use the POWER function for readability:

=POWER((A2/A1),1/A3)-1

This formula yields the same result as the direct formula and is especially useful for longer or more complex calculations.

3. Using the RRI Function

Excel provides the RRI function to calculate the equivalent interest rate per period:

=RRI(A3, A1, A2)

Here, A3 is the number of periods, A1 is the present value (initial investment), and A2 is the future value (ending investment).

4. Using the RATE Function

The RATE function can also be adapted for CAGR calculations:

=RATE(A3, 0, -A1, A2)

Set the payment parameter to zero since there are no periodic payments, only an initial and ending value.

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Example

Imagine you invested $5,000 (cell A1) and after 5 years (cell A3), your investment is worth $7,500 (cell A2). To calculate the CAGR:

=(7500/5000)^(1/5)-1

This results in a CAGR of approximately 8.45%. Format the cell as a percentage to display 8.45%.

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Tips for Using CAGR in Excel

• Always ensure your beginning value is greater than zero, and your periods are positive numbers.
• Format the result cell as a percentage for easier interpretation.
• Use the RRI or POWER functions for more flexibility and clarity, especially in complex spreadsheets.
• For irregular cash flows or investments made at different intervals, consider using the XIRR function instead of CAGR.

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