- Project plans
- Project activities
- Legislation and standards
- Industry context
- Specialist wikis
Last edited 10 Nov 2020
Compound Annual Growth Rate (CAGR)
Compound annual growth rate (CAGR) is a measure of the mean annual growth rate of an investment over a specified time period. It measures the growth rate effecting the value of the initial investment to that of the end-of-period investment, with the assumption that over that time period the investment has been compounding.
While CAGR isn’t a true return rate, it is a representational figure used to understand an investment’s returns and is considered a better measure of return over time. The effects of compounding are ignored by the average annual return figures, which can overestimate an investment’s growth. By contrast, CAGR uses a geometric average to represent the consistent rate at which, if compounding had occurred at the same annual rate, the investment would have grown.
The formula for CAGR is:
CAGR = (EV / BV)^(1 / n) - 1
- EV = Investment's end-of-period value
- BV = Investment's beginning value
- n = Number of periods (months, years, etc.)
- Year 1: £1,500
- Year 2: £2,000
- Year 3: £6,000
- Year 4: £8,000
- Year 5: £10,000
- Year 6: £12,000
The CAGR is: (12,000 / 2,000)^(1/6) – 1 = 0.348 = 34.8%
As it is a simple metric, CAGR is also flexible and can be used in a variety of ways, for example, comparing investments of different types, or tracking the performance of various measures alongside one another.
However, it should be used with other metrics to give a representative overall picture as it does have some limitations. For instance, it ignores volatility and implies that growth over the time period was steady, whereas in reality growth can be higher or lower from one year to the next. In addition, CAGR does not predict that the investment will continue to grow at the same rate, as it is only a historical metric. Many other factors might affect the rate of growth in future years.
 Find out more
 Related articles on Designing Buildings Wiki
- Base year.
- Cash flow.
- Cost engineering.
- Cost performance index (CPI).
- Cost-benefit analysis in construction.
- Gross value added (GVA).
- Internal rate of return.
- Net Present Value.
- Residual value.
- Investopedia - CAGR
Featured articles and news
The last few days, but action needed over the next decade.
80 construction leaders and companies from across the UK.
Promoting the importance of building and fire safety.
A brief run through essential training tips from a user.
A comprehensive guide from a Cohesive BIM wiki user.
From the basics to the future from our Cohesive BIM wiki.
As electrical sector feels skills shortage bite.
CIOB Academy’s course take-up inked to external factors.
Q and A with self-representing artist, Hannah Shergold.
And publishes three-year strategic plan.
Introducing changes to make it more effective from 2024.
Shortlist announced for 2023 public choice award vote.
The last of the Victorians. Book review.
An exotic name that is shrouded in mystery.
From practice to research and the business of materials.