Table of Contents

CAGR vs. IRR: What’s the Difference?

By 澳洲幸运5官方开奖结果体彩网:Ryan Furhmann

Updated March 29, 2025

Reviewed by

Charlene Rhinehart

Fact checked by

Yarilet Perez

Optimistic investment graph — RapidEye / Getty Images

CAGR vs. IRR: An Overview

The compound annual growth rate (CAGR) measures the return on an investment over a certain period of time. The 澳洲幸运5官方开奖结果体彩网:internal rate of return (IRR) also measures 澳洲幸运5官方开奖结果体彩网:investment performance. While CAGR is easier to calculate, IRR can cope with more co💃mplicated situations.

The most important distinction between CAGR and IRR is that CAGR is straightforward enough that it can be calculated by hand. In contras💯t, more complicated investments and projects, or those that have many dif𝓡ferent cash inflows and outflows, are best evaluated using IRR. To back into the IRR, a financial calculator, Excel, or portfolio accounting system is ideal.

Key Takeaways

The most important distinction between CAGR and IRR is that CAGR is straightforward enough that it can be calculated by hand.
The concept of CAGR is relatively straightforward and requires only three primary inputs: an investment’s beginning value, its ending value, and the time period.
IRR considers multiple cash flows and periods—reflecting the fact that cash inflows and outflows often constantly occur when it comes to investments.

CAGR

The concept of CAGR is relatively straightforward and requires only three primary inputs: an 澳洲幸运5官方开奖结果体彩网:investment’s beginning value, 🍨its ending value, and the time period. Online tools, including CAGR calculators, will spit out the CAGR when entering these three values.

An example of a CAGR calculation follows.

Initial Value = 1,000
Final Value = 2,200
Time period (n) = 4

[(Final Value) / (Initial Value)] ^ (1/n) - 1

In the above case, the CAGR is 21.7%.

The CAGR is superior to an 澳洲幸运5官方开奖结果体彩网:average returns figure because it takes into account how an investment is 澳洲幸运5官方开奖结果体彩网:compounded over time. However, it is limited in that it assumes a smoothed return over the time period measured, only taking into account an initial and a final value when, in reality, an investment usually experiences 澳洲幸运5官方开奖结果体彩网:short-term ups and downs. CAGR is also subject to 澳洲幸运5官方开奖结果体彩网:manipulation🤪, as the variable for the time period is input by the person calculating it and is not part of the calculation itself.

The CAGR helps frame an investment’s return over a certain period of time. It has its benefits, but there are definite limitations that 澳洲幸运5官方开奖结果体彩网:investors need to be aware of.

Important

In situations with multiple cash flows, the IRR approach is usually considered to be better than 𒁃CAGR.

IRR

IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects on a relatively even basis. The IRR is also a rate of return (RoR) metric, but it is more flexible than CAGR. While CAGR simply uses the beginning and ending values, IRR considers multiple 澳洲幸运5官方开奖结果体彩网:cash flows and periods—reflecting the fact that cash inflows and outfl𓆏ows often constantly occur when it comes to investments.

IRR can also be used in corporate ܫfinance when a project requires cash outflows upfront but then results in cash inflows as an investment pays off. Consider the following investme🐎nt:

Investment Example
Time Period	Cash Flow
0	-1,000
1	400
2	500
3	600
4	700

In th🐽e above case, using the Excel function “I🥃RR,” the rate is 36.4%.

The IRR is classified as a 澳洲幸运5官方开奖结果体彩网:discount rate that utilizes 澳洲幸运5官方开奖结果体彩网:net present value (NPV), making all cash flows equal to zero in a 澳洲幸运5官方开奖结果体彩网:discounted cash flow (DCF) analysis. In 🌟most situations, the higher the IRR, t൲he better the investment option.

IRR is often used by companies when they must choose which project is best among many options. A project that has an IRR above its 澳洲幸运5官方开奖结果体彩网:cost of capital is one that will be profitable.

The Importance of Volatility

In reality, investments experience 澳洲幸运5官方开奖结果体彩网:volatility. There is never a continuously smooth 澳洲幸运5官方开奖结果体彩网:market cycle that experiences linear growth. When running a business or expecting any sort of cash inflow, it is important for a business or investor to understand this so that they can successfully 澳洲幸运5官方开奖结果体彩网:manage their cash.

For example, if a company makes an investment that provides $5,000 a month, which covers their debt payments and 澳洲幸运5官方开奖结果体彩网:working capital, they may expect by using CAGR that every month for the life of the project or investment will result in a continuous🧔 cash stream of $5,000. However, some months may result in market or business▨ volatility, where the investment return will be less than $5,000, or even zero. This would impact their ability to make debt payments or fund working capital.

What Is the Compound Annual Growth Rate (CAGR)?

The compound annual growth rate (CAGR) is the rate of return that an investment would need to have every year in order to grow from its beginning balance to its ending balance, over a given time interval. The CAGR assumes t🤡hat any profits were reinvested at the end of each period of the investment’s life span.

What Is Internal Rate of Return (IRR)?

Internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. It is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a 澳洲幸运5官方开奖结果体彩网:discounted cash flow ൲(DCF) analysis. IRR is the annual 澳洲幸运5官方开奖结果体彩网:rate of growth that an investme🌌nt is expected to generate, with the ultimate goal of identifying the rate of discoꦿunt.

Why Is IRR Harder to Calculate Than CAGR?

The 澳洲幸运5官方开奖结果体彩网:formula for IRR 🐻can’t be easily calculated analytically because finding the discount rate that makes the net present value (NPV) of all cash flows equal to zero often 𒁃requires repeatedly adjusting the discount rate until the NPV reaches zero—a time-consuming, tedious trial-and-error process.

CAGR is easier to calculate because it uses a 澳洲幸运5官方开奖结果体彩网:simple formula based on the beginning value, the ending value, and the time period🌺.

The Bottom Line

It is more conservative and accurate to use IRR than CAGR when seriously evaluating any investment options, as it will take into ♔consideration true market volatility and the realities of the financial world.