Compound Annual Growth Rate Calculation

Compound Annual Growth Rate Formula:

\[ CAGR = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{n}} - 1 \]

Beginning Value:

currency unit or units

Ending Value:

currency unit or units

Number of Years (n):

years

Compound Annual Growth Rate (CAGR):

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1. What is Compound Annual Growth Rate (CAGR)?

Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified time period longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.

2. How Does the Calculator Work?

The calculator uses the CAGR formula:

\[ CAGR = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{n}} - 1 \]

Where:

\( \text{Ending Value} \) — Final value of the investment
\( \text{Beginning Value} \) — Initial value of the investment
\( n \) — Number of years

Explanation: CAGR measures the average annual growth rate of an investment over a specified time period, assuming the investment grows at a steady rate each year.

3. Importance of CAGR Calculation

Details: CAGR is widely used to compare the historical returns of different investments, evaluate business performance, and forecast future growth. It smooths out the volatility of periodic returns to provide a clearer picture of long-term performance.

4. Using the Calculator

Tips: Enter the beginning value and ending value in the same currency units, and specify the number of years over which the growth occurred. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What does CAGR measure?
A: CAGR measures the mean annual growth rate of an investment over a specified time period, providing a smoothed annual rate that describes the growth path.

Q2: How is CAGR different from average annual return?
A: CAGR accounts for compounding effect, while simple average return does not. CAGR provides a more accurate representation of investment performance over multiple periods.

Q3: What are typical CAGR values for investments?
A: Typical values vary by asset class. Stock market investments might average 7-10% CAGR, while bonds typically yield 3-5%. Higher CAGRs indicate better performance.

Q4: What are the limitations of CAGR?
A: CAGR assumes smooth, consistent growth and doesn't account for volatility or the sequence of returns. It may not reflect the actual year-to-year performance.

Q5: Can CAGR be negative?
A: Yes, if the ending value is less than the beginning value, CAGR will be negative, indicating an average annual decline in value.