Compound Annual Growth Rate Calculator

CAGR Formula:

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

Compound Annual Growth Rate (CAGR):

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1. What Is Compound Annual Growth Rate?

Compound 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:

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

Where:

Ending Value — Final value of the investment
Beginning Value — Initial value of the investment
t — Time period in years

Explanation: The formula calculates the constant annual growth rate that would take the beginning value to the ending value over the specified time period.

3. Importance Of CAGR Calculation

Details: CAGR is widely used to compare the historical performance of different investments, analyze business growth trends, and make investment decisions. It smooths out volatility and provides a standardized growth metric.

4. Using The Calculator

Tips: Enter the beginning value and ending value in dollars, and the time period in years. All values must be positive numbers with the beginning value greater than zero and time period greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is a good CAGR percentage?
A: A "good" CAGR depends on the investment type and market conditions. Generally, a CAGR above 8-10% is considered good for stock investments, but this varies by industry and economic climate.

Q2: How does CAGR differ from average annual return?
A: CAGR accounts for compounding effect while average annual return simply averages yearly returns. CAGR provides a more accurate representation of growth over time.

Q3: What are the limitations of CAGR?
A: CAGR assumes smooth growth and doesn't reflect volatility or risk. It also doesn't account for additional investments or withdrawals during the period.

Q4: Can CAGR be negative?
A: Yes, if the ending value is less than the beginning value, CAGR will be negative, indicating a loss over the period.

Q5: How is CAGR used in business analysis?
A: Businesses use CAGR to analyze revenue growth, customer growth, market share expansion, and compare performance across different time periods or against competitors.