In this tutorial, we will discuss the formula for calculating CAGR as well as provide an example of using the formula to evaluate an investment’s performance.
What is CAGR?
The compound annual growth rate (CAGR) is a measure of the rate of return on an investment over a specified period of time. It is used to compare the performance of investments in different years or to estimate the expected future performance of an investment.
How to Calculate CAGR?
The formula for calculating CAGR is as follows:
CAGR = (Ending Value / Beginning Value)^(1 / n) – 1
Where:
- Ending Value is the value of the investment at the end of the specified period.
- Beginning Value is the value of the investment at the beginning of the specified period.
- n is the number of years in the specified period.
In Excel, you can use the RRI function to calculate the compound annual growth rate (CAGR) of an investment.
Using the RRI function to get the CAGR
The RRI function has the following syntax:
RRI(nper, pv, fv)
Where:
- nper is the total number of periods for the investment
- pv is the present value of the investment
- fv is the future value of the investment at the end of the specified period.
Step-by-Step Guide
In this example, we want to know the end growth rate of an investment after 6 years. Using the =RRI function, we can achieve this. Here’s a step-by-step guide.
- Enter the formula =RRI(A8,B2,B8)
- Press Enter, and the cell will show the result of the compound annual growth rate (CAGR)
The result is 6%, meaning the investment grew at an average annual rate of 6% over the 6-year period.
Note: It’s important to keep in mind that the CAGR is a theoretical rate; it doesn’t reflect the actual cash flows or the volatility that an investment may experience over the time period.
Conclusion
The compound annual growth rate (CAGR) is an important measure of the rate of return on an investment over a specified period of time. It is often used to compare the performance of investments with different durations or to estimate the expected future performance of an investment. The RRI function in Excel can be used to easily calculate CAGR by inputting the total number of periods, the present value, and the future value of the investment.
