CAGR is the compounded annual growth rate of an investment over a specific period of time. It tells us how much return one has got or can expect to gain from an investment opportunity. https://efinancemanagement.com/investment-decisions/cagr-vs-irr

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eFinanceManagement.com
https://efinancemanagement.com/investment-decisions/cagr-vs-irr
Compounded Annual Growth Rate vs
Internal Rate of Return

2. 1. Meaning
2. How to Calculate?
3. Advantages of CAGR over IRR
4. Advantages of IRR over CAGR
5. Reference
Content

3. Compounded Annual Growth Rate:
CAGR is the compounded annual growth rate of an investment over a specific period of time. It tells us how much
return one has got or can expect to gain from an investment opportunity. Hence, it is a vital calculation and helps to take
a prudent and wise investment decision.
Internal Rate of Return:
IRR is the discount rate at which the NPV of the cash flows from any investment becomes zero. The objective remains
to determine the rate of interest (by trial and error) that makes the net present value of all cash inflows and outflows over
the period at Zero levels.
Meaning

4. CAGR:
(Ending value/ Beginning value of the investment)^1/time period of investment – 1
IRR:
At IRR, NPV= Cash flow over the time period/ (1 + r)^n = 0
How to Calculate?

5. 1. Easy to use:
The concept of CAGR is much easier to use than IRR. We need only three inputs for its calculation – initial investment,
exit value, and investment period, which are easily available.
2. Compare different investment avenues:
CAGR can be very helpful in cases where frequent cash inflows and outflows are not expected. A comparison between
the CAGR of different projects or investment avenues can help to decide which one is the better option and where to
invest.
Advantages of CAGR over IRR

6. 1. Variation in returns:
The IRR takes into account the variations in returns or the market volatility over the period of investment. It takes into
account the cash flow that the investment generates over the entire time period.
2. Helpful in project comparison:
It takes into account the initial cash outflow as well the cash inflows that each project can generate over their time frame.
Thus, it provides a much broader outlook than the CAGR.
3. Capital expenditure decisions:
The time value of money concept plays a vital role in business investments. And IRR is a better and preferred method to
understand this.
Advantages of IRR over CAGR

7. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/investment-decisions/cagr-vs-irr