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IRR Vs CAGR | Difference | Comparison

The return on investment over time is gauged by the compound annual growth rate or CAGR. The internal rate of return(IRR) gauges the effectiveness of investments. While Compounded annual growth rate(CAGR) is simpler to compute, IRR can handle scenarios that are more complex. To understand the return and quality of investment return, there are many measures or indicators in the financial industry. CAGR and IRR are two such indicators. Let us discuss the difference between IRR Vs CAGR with the help of the comparison given below.

What is IRR?

IRR because IRR is consistent across investments of various sorts, it may be used to rate a variety of potential projects fairly. Another rate of return(RoR) indicator is the IRR, which is more adaptable than CAGR. IRR takes into account numerous cash flows and periods, reflecting the reality that cash inflows and outflows frequently occur continuously when it comes to investments -  in contrast to CAGR, which only utilises the starting and ending values. 

Read more about IRR Vs ROI

What is CAGR?

The investment's compounded annual growth rate (CAGR) over a specific period of time. The only three significant variables required to calculate CAGR are the investment's beginning value, ending value, and time period. Online tools, such as CAGR calculators, will output the CAGR when these three variables are entered.

Read more about YTM Vs IRR

IRR Vs CAGR | Difference between IRR and CAGR:

  • Compared to IRR, calculating CAGR is easier since there are only two values to calculate: The starting value and the end value.
  • The periodic investment is not taken into account by CAGR, for determining the growth rate, only the starting investment and the end value are needed. IRR, in contrast to CAGR, accounts for both positive and negative periodic cash flows in its computation. 
  • For assessing complicated or big projects, which frequently have several positive and negative cash flows, IRR is preferable above CAGR. IRR is a more accurate measure in these circumstances.
  • In the financial world, the IRR is more realistic than the CAGR since it takes into account recurring cash flows than a single, large investment.
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