In this article, we will learn How to Calculate the Compound Annual Growth Rate "CAGR" in Microsoft Excel.
What is CAGR ?
Compound annual growth rate (CAGR) is a business and investment term that provides a constant rate of return over the time. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time.
RRI is the equivalent interest rate for growth of an investment. Generally it is used to calculate the Compound Annual Growth Rate (CAGR). It returns the interest rate for the given period of time having future and present value of investment. The mathematical formula to calculate CAGR or RRI value is shown below.
RRI or CAGR = [(FV/PV) ^ (1/nper)] - 1
Here nper is the time period over which the rri value is calculated. Let's understand how to calculate CAGR in excel.
RRI function in Excel
RRI function in excel returns the equivalent interest rate over a given period of time. This interest rate is calculated for the difference between present value and future value of investment. Let's see the below function syntax to understand.
RRI Function syntax:
|=RRI(nper, pv, fv)|
nper : period of time in years
pv : present value of investment
fv : future value of investment
All of these might be confusing to understand. Let's understand how to use the function using an example. Here we are given a list of amounts over a period of 9 years. We need to calculate the Annual Growth Rate for the following data. First we will calculate the annual growth percentage for the first year.
Use the formula:
|=RRI (1, C4, C5)|
As you can see there is 4 percent growth in Sales for the first year. Now extend this formula to the remaining cells using the Ctrl + D or dragging down from the right bottom of the formula acquired cell.
This array indicates the annual growth in each year comparing value in the start of period (pv) with the value at the end of period (fv). This function allows you to choose the time interval between two values. Now we will calculate the equivalent interest for the whole 9 years.
Use the formula:
|=RRI (9, C4, C13)|
The equivalent compound annual growth rate comes out to be 14%. The formula might not return the value in percentage, it might be showing 0.141 (in decimals). Change the format of the cell from Number to Percentage.
Calculate RRI using CAGR formula in excel
Calculate the same result using the mathematical formula stated formula. CAGR = [(FV/PV) ^ (1/nper)] - 1. This ^ character indicates the power of the base value.
Use the formula:
C13 : future value
C4 : present value
9 : period of investment
The formula returns 14%, the same value returned by the RRI function. Functions are easy to use and there are less chances of error, than using the mathematical formula.
Here are some observational notes using the RRI function shown below.
Hope this article about How to Calculate the Compound Annual Growth Rate "CAGR" in Microsoft Excel is explanatory. Find more articles on calculating values and related Excel formulas here. If you liked our blogs, share it with your friends on Facebook. And also you can follow us on Twitter and Facebook. We would love to hear from you, do let us know how we can improve, complement or innovate our work and make it better for you. Write to us at email@example.com.
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