Difference Between CAGR and IRR
Basis | Compound Annual Growth Rate (CAGR) | Internal Rate of Return (IRR) |
---|---|---|
Purpose | CAGR is usually used to show an investment’s average yearly growth rate over a given time period. It is a consistent rate that generates the same final value. | IRR is used to assess an investment’s profitability by calculating the discount rate that compares the present value of cash inflows with the present value of cash outflows. |
Assumption | CAGR necessitate a constant rate of growth over the entire periodassumes, which may not accurately reflect the year-to-year shift in growth rates. | IRR makes the assumption that cash flows will be reinvested at the calculated IRR, which isn’t necessarily realistic or feasible in real-life circumstances. |
Application | CAGR is frequently used to evaluate average annual growth, compare the past performance of assets, and establish performance benchmarks. | IRR is frequently used to determine capital budgeting, evaluate projects, and determine an investment’s internal profitability. |
Handling Multiple Rates | The compound annual growth rate (CAGR) is a single rate that indicates the average annual growth. It cannot manage multiple rates of return or changes in the cash flow direction of the investment. | IRR can handle numerous rates of return, including cash flow direction changes (negative to positive and vice versa). |