When you're analyzing investments, business growth, or projections, simple year-over-year percentages often mislead because they ignore compounding and cash flow timing. That's where CAGR (Compound Annual Growth Rate) and related formulas like IRR, ROI, and Compound Interest become essential.
In this comprehensive guide, you'll learn everything about CAGR formula and related financial growth metrics that are essential for investment analysis, business planning, and financial modeling.
This guide covers:
CAGR stands for Compound Annual Growth Rate. It's the average annual growth rate of an investment over a period, assuming profits are reinvested. Unlike simple average growth, CAGR smooths out volatility and gives a standardized annual growth number.
If an investment grew from $10,000 to $20,000 over 3 years:
CAGR = (20,000 / 10,000)1/3 - 1 = 0.2599 = 25.99%
This means the investment grew at an average annual rate of 25.99% over the 3-year period.
You can experiment with your own values using our free CAGR Calculator.
In Excel you can write:
Or with cell references, for example:
You can also format the result as a percentage for better readability.
Use LetCalculate's CAGR Calculator Excel version to download and practice. Or try our interactive web tool at Advanced CAGR Calculator 2025 for instant results.
IRR (Internal Rate of Return) is the rate at which the Net Present Value (NPV) of all cash flows (inflows & outflows) equals zero. In other words, it accounts for multiple cash flows, timing, and discounting.
Where C₀ is the initial investment (negative), and C₁, C₂, … Cₙ are cash flows over time.
IRR is widely used in project evaluation, capital budgeting, and investment comparisons. (Corporate Finance Institute)
Try our IRR Calculator 2025 to compute IRR interactively.
For a fuller comparison, see Investopedia's article on CAGR vs IRR.
ROI is a simpler measure of profitability:
ROI doesn't consider time value or cash flow timing. Use it for quick profitability estimates, but not for deeper investment analysis.
Compound Interest Formula:
Future Value (FV) simple version:
These formulas are foundational in financial modeling and useful to compare with CAGR/IRR when cash flows are constant.
MIRR modifies IRR's assumption about reinvestment rates. It assumes that positive cash flows are reinvested at a safer reinvestment rate (like cost of capital) instead of at the IRR itself. This often gives a more realistic result when cash flows are uncertain.
Suppose a company's revenue grows from $1,000,000 to $1,800,000 over 4 years.
CAGR = (1,800,000 / 1,000,000)1/4 - 1 = 0.1597 = 15.97%
That means the business grew, on average, ~15.97% per year (compounded).
Imagine you invest $100,000 now (year 0), then receive:
Use NPV = 0 equation and solve for r. Or use Excel's =IRR() function or our IRR Calculator.
| Metric | Best Use | Limitations |
|---|---|---|
| CAGR | Steady growth over time | Doesn't handle irregular cash flow |
| IRR | Projects with multiple cash flows | Assumes reinvestment at IRR; complex |
| ROI | Quick profit snapshot | No time value of money |
| MIRR | More realistic reinvestment assumption | Requires selecting reinvestment rate |
For most investment tools and projects, use CAGR for high-level growth and IRR for detailed cash flow models.
Be cautious and use multiple metrics (NPV, payback period) in conjunction with CAGR and IRR for comprehensive financial analysis.
The CAGR formula is a powerful, elegant way to summarize growth over time. But with IRR, ROI, MIRR and compound interest formulas at your disposal, you gain a richer toolkit to analyze complex investments and projects.
Use our web tools here to bring formulas to life:
Understanding these financial formulas will help you make better investment decisions, evaluate business performance more accurately, and communicate financial results more effectively.
Put these formulas into practice with our easy-to-use financial calculators designed for accuracy and efficiency.
Try CAGR Calculator Try IRR Calculator