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Compound annual growth rate (CAGR) formula calculator
Description
Discover the power of investment growth with our Compound Annual Growth Rate (CAGR) calculator. CAGR is a key metric for assessing the performance of investments, and our user-friendly tool helps you easily calculate it. Input your initial and final values, specify the time frame, and let our CAGR calculator provide you with valuable insights into your investment's annual growth rate. Whether you're planning for your financial future or evaluating past investments, our CAGR calculator simplifies the process, making it accessible to everyone. Start maximizing your financial decisions today!
Info
Useful links
- Price-to-Earnings (P/E) calculator
- Net profit margin formula calculator
- Earnings before interest and taxes (EBIT) calculator
- Return on investment (ROI) calculator
- Compound interest calculator
Explain the Formula
CAGR is calculated using the following formula:
CAGR = (EV / BV) ^ (1 / n) - 1
- CAGR: Compound Annual Growth Rate
- EV: Ending Value or Final Value
- BV: Beginning Value or Initial Value
- n: Number of years (or periods)
CAGR considers the compounding effect of returns, making it an effective tool for evaluating investment performance.
How to Use CAGR with Example
To use the CAGR formula, follow these steps with an example:
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Determine Initial and Final Values: Identify the beginning value (BV) and ending value (EV) of the investment over a specified period.
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Determine the Time Period: Calculate the number of years (n) over which you want to calculate the CAGR.
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Apply the Formula: Use the formula: CAGR = (EV / BV) ^ (1 / n) - 1.
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Calculate: Calculate the value inside the parentheses first (EV / BV), then raise it to the power of 1/n. Subtract 1 to obtain the CAGR as a decimal.
Example: Suppose you invest $1,000, and it grows to $1,500 over five years. Using the formula:
- BV = $1,000
- EV = $1,500
- n = 5
- CAGR = (($1,500 / $1,000) ^ (1/5)) - 1 ≈ 8.447%
Frequently Asked Questions (FAQ)
Q1: Why is CAGR important for investors?
CAGR is crucial because it accounts for the compounding of returns, providing a more accurate representation of an investment's performance over time.
Q2: Is a higher CAGR always better?
Not necessarily. A high CAGR may indicate strong growth, but it's essential to consider risk, investment horizon, and other factors when evaluating investments.
Q3: Can CAGR be negative?
Yes, CAGR can be negative, indicating a decline in the investment's value over the given period.
Conclusion
Compound Annual Growth Rate (CAGR) is a powerful tool for assessing investment performance. By understanding the formula, using it with real-world examples, and leveraging CAGR calculators, investors can make informed decisions and gain valuable insights into their financial growth. It's an essential metric for those looking to plan their financial future effectively.