The Compound Annual Growth Rate, or CAGR, is an important measure of investment performance and financial progress. In Excel, there are various methods to compute CAGR, ranging from simple formulas to advanced functions. This article is a tutorial that will lead you through the best methods to use to calculate CAGR in Excel.
Understanding CAGR
CAGR is the average annual growth rate of an investment within a given timeline longer than one year. It can be calculated from the formula:
{CAGR} = {[Ending Value]/[Beginning Value]}^[1/n]–1
Where:
Ending value = final value of the investment
Beginning value = initial value of the investment
n = number of years
Calculating CAGR in Excel
Here are the five most dependable methods to calculate CAGR in Excel:
- Basic CAGR formula
The simplest way to compute CAGR in Excel is using the simple formula:
{[Ending Value]/[Beginning Value]}^[1/n]–1
- Assuming your beginning value is in cell B2, ending value in cell C2, and number of years in cell D2, we shall be assuming these cell values in all the further mentioned methods.
For example, the formula would be: {[C2]/[B2]}^[1/D2]–1
- Using the RRI function
Excel’s RRI function computes the interest rate required for an investment to increase from a present value to a future value in a specified number of periods. The formula is:
RRI(nper, pv, fv)
Where:
- nper = number of periods
- pv = present value (starting value)
- fv = future value (ending value)
For instance, the formula would be: RRI(D2, B2, C2)
- By using the RATE function
The RATE function returns the interest rate per period for an annuity. Though mostly applied to loans, it can be used to compute CAGR if there are no periodic payments:
RATE(nper,, pv, fv)
- The double comma is to denote no periodic payments.
For example, the formula will be RATE (D2, B2, C2)
- Applying the POWER function
The POWER function increases a number to a given power, which can be utilised to compute CAGR:
POWER (Ending Value / Beginning Value, 1/n) – 1
For instance, the formula is denoted as POWER (C2/B2, 1/D2) – 1.
- Using the GEOMEAN function
If you have numerous periodic growth rates, the GEOMEAN function computes the geometric mean that can be developed to calculate CAGR:
GEOMEAN (1 + growth rates)–1
For instance, assuming you have annual growth rates in cells E2:E6: GEOMEAN (1+E2:E6)–1
Example:
Assume you are making a capital investment which you want to increase from ₹1,00,000 to ₹2,00,000 in 5 years. To find CAGR using Excel:
- Input the starting value in cell B2: 100000.
- Input the final value in cell C2: 200000.
- Input the number of years in cell D2: Five.
- Apply any of the above methods to find CAGR.
Applying the simple formula:
[(C2/B2)^(1/D2)]–1
[(200000)/(100000)^(1/5)]–1
1.14869–1 = 0.1487 or 14.87%
This would yield a CAGR of about 14.87%.
Common errors to be avoided
The following are the common mistakes you can prevent when applying CAGR on an Excel spreadsheet.
- Incorrect calculation of time: Make sure you are counting the right number of years between your initial and final values.
- Overlooking partial years: In case your investment period is not a whole number of years, make the necessary adjustments in your calculation.
- Misunderstanding results: Keep in mind that CAGR is an averaged value and not a representation of actual annual returns.
Conclusion
Learning CAGR calculations in Excel is an important technique for gaining insights into investment performance and making sound financial decisions. Using these methods, you can effectively calculate growth rates and compare various investment opportunities.
