What is CAGR?
CAGR is an acronym for Compound Annual Growth Rate, which is a formula used to estimate the annual return rate an investment would need to earn to grow from a given beginning value to a given ending value.
What is CAGR Useful For?
The CAGR calculation is primarily useful for the following three scenarios:
- When you want to know the average return rate on an investment that fluctuates widely from year to year.
- When you want to know what annual rate of return needed to earn to achieve a future target value.
- When you need to forecast the future value of an investment.
How to Calculate CAGR
When it comes to calculating CAGR, you have three options: a spreadsheet function, an online calculator like the one on this page, or a handheld calculator capable of raising a base number to a fractional power.
If you are attempting to use a spreadsheet to calculate CAGR (Excel, OpenOffice, etc.), I use the RRI function, which calls for the following inputs:
Where
- nper represents the number of periods.
- pv represents the starting or present value of the investment.
- fv represents the ending or future value of the investment.
If you are attempting to calculate CAGR manually using a handheld calculator, here is the compound annual growth rate formula and an example showing the steps to solving it.
| CAGR Formula | ||
| FV | (1/n) | − 1 |
| PV | ||
| Example: PV = 1000, FV = 2000, n = 10 (years) | |||
| Step | Explanation | Equation | Result |
|---|---|---|---|
| #1 | Divide FV by PV: | 2000 ÷ 1000 | = 2.00000 |
| #2 | Raise Step #2 to the power of 1/n (n = yrs): | (2.00000)1/10 | = 1.07177 |
| #3 | Subtract 1 from Step #2: | 1.07177 − 1 | = 0.07177 |
| #4 | Multiply Step #3 by 100: | 0.07177 × 100 | = 7.17735 |
| #5 | Round Step #4 and add % sign: | CAGR | = 7.177% |
Reverse CAGR Calculator
If you already know the compound annual growth rate, you can use the following calculator to calculate an investment's future value (or maturity value). Enter the investment amount, the compound annual growth percentage rate, and the number of periods (months or years) and the calculator will calculate the investment's future/maturity value and display a period-by-period growth chart.
In case you're interested, the reverse CAGR formula in Excel is the FV function.
Where
- rate represents the decimal equivalent of the compound growth percentage rate (6% = .06).
- nper represents the number of periods (months or years).
- pmt represents an amount that is regularly added to the investment.
- pv represents the starting or present value of the investment.
- type represents the timing of the payment.
If you want to calculate the reverse CAGR of $1,000 invested for 5 years, with a CAGR of 6%, you would set a cell equal to the following:
In the above example, the reverse CAGR would be $1,338.23.
