What is CAGR? Formula?
“Formula For Compound Annual Growth Rate in Excel” is an essential metric that helps investors accurately measure how an investment grows over a specified period. By assuming that profits are reinvested annually, it provides a more reliable growth rate. Moreover, CAGR offers a smoothed annual return, effectively eliminating the impact of market volatility and making it easier to compare different investments.
Why Use Excel for CAGR Calculation?
“Excel makes it incredibly easy to calculate CAGR by providing built-in formulas and functions. This not only helps users automate calculations effortlessly but also enables them to analyze financial data more efficiently and accurately.”Check out our Excel formulas guide for more tips.
Formula for Compound Annual Growth Rate in Excel
The standard CAGR formula is:
Steps to Calculate CAGR in Excel
Follow these simple steps to calculate CAGR in Excel:
Method 1: Using the Manual Formula for Compound Annual Growth Rate in Excel
- “To get started, open Excel and then enter the following values in separate cells.”
- Beginning Value (e.g.,
$10,000in cellB2) - Ending Value (e.g.,
$25,000in cellB3) - Number of Years (e.g.,
5in cellB4)
“To apply the formula, first select an empty cell, such as B5. Then, carefully enter the following
formula: =(B3/B2)^(1/B4)-1
After that, press Enter to calculate the CAGR. Finally, if needed, format the result as a percentage to enhance readability and make the data easier to interpret.”
- Format the result:
“After entering the formula, simply press Enter to obtain the CAGR value. Next, to improve clarity, format the cell as a percentage by selecting it, then clicking the Percentage (%) button in the toolbar. Alternatively, you can use the shortcut Ctrl + Shift + % for a quicker adjustment.”
Method 2: Using the POWER Function Formula For Compound Annual Growth Rate
Excel’s POWER function simplifies CAGR calculations.
- Enter the data in cells B2, B3, and B4 as in the previous method.
- Use the POWER function:
In an empty cell (e.g., B5), enter:
=POWER(B3/B2,1/B4)-1
3. Format as a percentage:
Follow the same formatting steps to display the result correctly.
Method 3: Using the RRI Function (Excel’s Built-in CAGR Function)
“In Excel, the RRI function provides a straightforward way to calculate CAGR directly.
To proceed, simply enter the formula =RRI(B4, B2, B3) in an empty cell. After that, press Enter to compute the CAGR value instantly. Finally, if necessary, format the result as a percentage to enhance readability and make the data easier to interpret.”
Practical Example
“For example, let’s say you initially invested $10,000 in 2018. Over the years, your investment grew, and by 2023, it reached $25,000. To calculate the CAGR in Excel, you will need the following values:
- Beginning Value:
$10,000 - Ending Value:
$25,000 - Number of Years:
5
Using the formula:
=(25000/10000)^(1/5)-1
The CAGR is 20%.
Conclusion
“Calculating CAGR in Excel is quite simple, as you can use different formulas such as the manual method, the POWER function, or the RRI function. By mastering these techniques, you will be able to analyze investment growth more effectively. Try it in your own Excel sheet and gain better insights into your financial data! If you’re interested in more Excel tutorials, visit our PivotXL Excel Tutorials page.
