Calculation of Compound Interest Rate in Excel

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Compound Annual Growth Rate (CAGR) Calculator

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Enter values above to see the CAGR.
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Understanding Compound Annual Growth Rate (CAGR)

The Compound Annual Growth Rate (CAGR) is a crucial metric for investors and businesses alike. It represents the average annual rate of return of an investment over a specified period of time, assuming that profits were reinvested at the end of each year. Unlike simple average returns, CAGR takes into account the effect of compounding, providing a smoothed-out growth rate that is more reflective of an investment's true performance over time.

CAGR is particularly useful because it:

  • Smooths out volatility: It ignores the volatility of the investment year-to-year and instead provides a steady, representative growth rate.
  • Allows for comparison: It enables investors to compare the performance of different investments with varying holding periods on an equal footing.
  • Simplifies complex growth: It distills a multi-year growth trajectory into a single, understandable annual percentage.

How to Calculate CAGR

The formula for CAGR is as follows:

CAGR = ( (Ending Value / Beginning Value) ^ (1 / Number of Years) ) – 1

In this formula:

  • Ending Value: The value of the investment at the end of the period.
  • Beginning Value: The value of the investment at the beginning of the period.
  • Number of Years: The total number of years over which the investment grew.

The result is then typically multiplied by 100 to express it as a percentage.

Example Calculation

Let's say you invested $10,000 in a stock five years ago, and its current value is $25,000. To calculate the CAGR:

  • Beginning Value = $10,000
  • Ending Value = $25,000
  • Number of Years = 5

Using the formula:

CAGR = ( ($25,000 / $10,000) ^ (1 / 5) ) – 1

CAGR = ( 2.5 ^ 0.2 ) – 1

CAGR = 1.2011 – 1

CAGR = 0.2011

To express this as a percentage, we multiply by 100:

CAGR = 0.2011 * 100 = 20.11%

This means that your investment grew at an average annual rate of 20.11% over the five-year period, taking compounding into account.

Use the calculator above to easily determine the CAGR for your own investments.

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