Compounding Annual Growth Rate Calculator

CAGR Formula:

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

Beginning Value:

currency or units

Ending Value:

currency or units

Number of Years (n):

years, unitless

CAGR (decimal):

CAGR (percentage):

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1. What is Compounding Annual Growth Rate?

Compounding Annual Growth Rate (CAGR) is a financial metric that represents the mean annual growth rate of an investment over a specified time period longer than one year. It provides a smoothed annual rate that describes the growth trajectory as if it had grown at a steady rate.

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: The formula calculates the constant annual growth rate that would take you from the beginning value to the ending value over the specified number of years, assuming compound growth.

3. Importance of CAGR Calculation

Details: CAGR is widely used in finance and business to compare the historical performance of different investments, analyze business growth, and project future growth. It smooths out volatility and provides a clear picture of long-term performance.

4. Using the Calculator

Tips: Enter the beginning value, ending value, and number of years. All values must be positive numbers. The calculator will provide both decimal and percentage formats of the CAGR.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between CAGR and average annual return?
A: CAGR accounts for compounding effects, while average annual return simply averages the yearly returns without considering compounding.

Q2: Can CAGR be negative?
A: Yes, if the ending value is less than the beginning value, CAGR will be negative, indicating a decline in value over the period.

Q3: What are the limitations of CAGR?
A: CAGR assumes smooth, consistent growth and doesn't reflect volatility or interim fluctuations in value.

Q4: How is CAGR used in investment analysis?
A: It's used to compare performance of different investments, evaluate mutual funds, and assess business growth over multiple periods.

Q5: Can I use CAGR for periods less than one year?
A: While mathematically possible, CAGR is typically used for periods of one year or longer to provide meaningful annualized growth rates.