Explanation
CAGR stands for Compound Annual Growth Rate. CAGR is the average rate of return for an investment over a period of time. It is the rate of return required for an investment to grow from the starting balance to the ending balance, assuming profits are reinvested each year, and interest compounds annually. There are several ways to calculate CAGR in Excel.
CAGR with the RRI function
In Excel 2013 and later, you can use the RRI function to calculate CAGR with a simple formula. The formula in H9 is:
=RRI(B11,C6,C11)
where C11 is the ending value in year 5, C6 is the starting value (initial investment), and B11 is the total number of periods.
Note: unlike most other financial functions in Excel, fv (future value, the third argument) does not need to be entered as a negative number in RRI.
CAGR with a manual formula
The formula for calculating CAGR manually is:
=(end/start)^(1/periods)-1
In the example shown, the formula in H7 is:
=(C11/C6)^(1/B11)-1
where C11 is the ending value in year 5, C6 is the starting value or initial investment, and B11 is the total number of periods.
The first part of the formula is a measure of total return, and the second part of the formula annualizes the return over the life of the investment.
CAGR with the GEOMEAN function
The GEOMEAN function calculates geometric mean, and can also be used to calculate CAGR. To calculate CAGR with GEOMEAN, we need to use relative changes (percentage change + 1), sometimes called a growth factor. We have these values already in column E so we can use them directly in GEOMEAN the function. The formula in H8 is:
=GEOMEAN(E7:E11)-1
Related functions
GEOMEAN Function
The Excel GEOMEAN function returns the geometric mean for a set of numeric values. Geometric mean can be used to calculate average rate of return with variable rates.
RRI Function
The Excel RRI function returns an equivalent interest rate for the growth of an investment. You can use RRI to calculate Compound Annual Growth Rate (CAGR) in Excel.
