The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. The internal rate of return, or IRR, also measures investment performance but is more flexible than CAGR.
CAGR
The concept of CAGR is relatively straightforward and requires only three primary inputs: an investment’s beginning value, ending value, and the time period. Online tools, including Investopedia’s CAGR calculator, will spit out the CAGR when entering these three values. The CAGR is superior to average returns because it considers the assumption that an investment is compounded over time. One limitation is 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 shortterm ups and downs. CAGR is also subject to manipulation as the variable for the time period is input by the person calculating it and is not part of the calculation itself. Consider the following investment:
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%
IRR
IRR is also a rate of return but is more flexible in that it considers multiple cash flows and periods. While CAGR simply uses the beginning and ending value, in reality cash inflows and outflows occur when it comes to investments. IRR can also be used in corporate finance when a project requires cash outflows upfront but then results in cash inflows as an investment pays off. Consider the following investment:
Time period 
Cash Flow 
0 
1000 
1 
400 
2 
500 
3 
600 
4 
700 
In the above case, using the Excel function “IRR,” we obtain 36.4%.
Differences Between CAGR and IRR
The most important distinction is that CAGR is straightforward enough that it can be calculated by hand. In contrast, more complicated investments and projects, or those that have many different cash inflows and outflows, are best evaluated using IRR. To back into the IRR rate, a financial calculator, Excel, or portfolio accounting system is ideal. The example above used Excel to calculate the IRR but computation on a financial calculator is similar.
The Bottom Line
The CAGR helps frame an investments return over a certain period of time. It has its benefits, but there are definite limitations that investors need to be aware of. With multiple cash flows, the IRR approach is usually considered to be better than CAGR.

What is the formula for calculating compound annual growth rate (CAGR) in Excel?
The concept of CAGR is relatively straightforward and requires only three primary inputs: an investments beginning value, ... Read Answer >> 
Why is the compound annual growth rate (CAGR) misleading when assessing longterm ...
The compound annual growth rate (CAGR) measures the return on an investment over a certain period of time. Below is an overview ... Read Answer >> 
How do you calculate CAGR?
Find out how to understand and use the compound annual growth rate formula, and find out why it helps put an uneven performance ... Read Answer >> 
What is the formula for calculating internal rate of return (IRR) in Excel?
Understand how to calculate the internal rate of return (IRR) using Excel and how this metric is used to determine anticipated ... Read Answer >> 
What is the formula for calculating the internal rate of return (IRR)?
Learn about the internal rate of return, an important concept in determining the relative attractiveness of different investments. Read Answer >> 
Which is a better measure for capital budgeting, IRR or NPV?
In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ... Read Answer >>

Investing
Internal Rate Of Return: An Inside Look
Use this method to choose which project or investment is right for you. 
Investing
The Most Accurate Way To Gauge Returns: The Compound Annual Growth Rate
The compound annual growth rate, or CAGR for short, represents one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios and anything that ... 
Small Business
Calculating the Internal Rate of Return Using Excel
The internal rate of return on investments is explained and illustrated in different investment scenarios. 
Investing
Return on Investment (ROI) Vs. Internal Rate of Return (IRR)
Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI). 
Investing
Internal Rate of Return Formula for Excel
The internal rate of return, or IRR, is a popular metric businesses use to measure a project’s return on investment. 
Financial Advisor
The 15 FastestGrowing RIAs
Registered investment advisors are consolidating their business and assets. Here are 15 of the fastestgrowing RIAs. 
Investing
Learn Simple And Compound Interest
Interest is defined as the cost of borrowing money, and depending on how it is calculated, can be classified as simple interest or compound interest. 
Small Business
Capital Budgeting: Which is Better, IRR or NPV?
Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense. 
Financial Advisor
Understanding Internal Rate Of Return
Internal rate of return, or IRR, is one of the most popular methods of evaluating potential projects. Learn more about this important metric. 
Investing
An Introduction To Capital Budgeting
We look at three widely used valuation methods and figure out how companies justify spending.

Compound Annual Growth Rate  CAGR
The Compound Annual Growth Rate (CAGR) is the mean annual growth ... 
Internal Rate Of Return  IRR
A metric used in capital budgeting measuring the profitability ... 
The Net Internal Rate Of Return  Net IRR
A measure of a portfolio or fund's performance that is equal ... 
IRR Rule
A measure for evaluating whether to proceed with a project or ... 
IRR
The currency abbreviation or currency symbol for the Iranian ... 
Pooled Internal Rate Of Return  PIRR
A method of calculating the overall internal rate of return (IRR) ...