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Compound Annual Growth Rate Formula:
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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.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much an initial investment will grow over time when interest is compounded annually.
Details: CAGR is widely used to compare the historical returns of different investments, evaluate business growth, and make informed financial decisions. It smooths out the volatility of periodic returns to show a consistent annual growth rate.
Tips: Enter the initial investment amount in dollars, annual growth rate as a percentage, and the number of years for the investment period. All values must be positive numbers.
Q1: What is the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest from previous periods.
Q2: Can CAGR be negative?
A: Yes, CAGR can be negative if the investment loses value over the specified period, indicating an annual decline in value.
Q3: Is CAGR the same as annual return?
A: CAGR represents the smoothed annual growth rate, while actual annual returns may vary significantly from year to year.
Q4: What are the limitations of CAGR?
A: CAGR doesn't account for investment risk, volatility, or the timing of cash flows. It assumes steady growth which rarely occurs in reality.
Q5: How is CAGR used in business?
A: Businesses use CAGR to analyze revenue growth, market share expansion, and to compare performance against competitors over multiple years.