CAGR Calculator (compond Annual Growth Rate)
If you want to estimate the potential return from an investment, the CAGR calculator is the tool for you!
CAGR (Compound Annual Growth Rate)
Table of contents
CAGR calculator can be used by anyone who needs to calculate the potential return from an investment. This calculator uses the Compound Annual Growth Rate formula (CAGR). The growth rate can be used to determine the profit from your investment for a specific period.
All of this information is helpful when you are choosing a savings account or where to put it. When you plan any capital expenditure, you might need a CAGR calculator.
What is the compound interest?
Understanding the concept of compound annual rate is possible by first understanding compound interests.
Compounded interest, in finance, is the interest earned both on the initial investment amount and on any interest. The compound interest calculation is the sum of the interest earned on the initial principal and any interest accrued during subsequent periods. A compounding effect makes it faster for a loan or deposit to grow.
It is difficult to calculate compound interest because it involves not only the annual interest rate, the number of years, and the number of compounding years. You can summarize it as follows:
FV = PV (1 + r/m) ^ mt
FV: The future value for the investment
PV: The initial balance (the investment's present value);
r: the annual interest rate, in decimal
m: The number of times interest is compounded annually (compounding frequency).
t: is the number of years that the money was invested.
If the interest is compounded only once per year (m=1), then the compound annual rate (CAGR), is what you would call it.
What is CAGR (Compound Annual Growing Rate)?
CAGR stands for Compound Annual Rate. This is what we already explained in the intro. CAGR can be defined as the annual rate at which investment must grow from its initial balance to its final value within a particular time period. CAGR is calculated with the assumption that incomes are reinvested each year.
It is important to remember that the compound annual rate of growth is an approximate number and not a true return rate. CAGR (or compound annual growth rate) is a number that indicates the rate investment would have grown if it grew at the same rate every year over the entire period (assuming the profits were reinvested at the end of each year).
In real life, this is not possible. However, CAGR is used to smoothen the rate return over the entire investment period. It is useful for comparing investments.
What is the difference between compound annual growth rate (simple growth rate) and compound annual growth rates (compound annual growth rate)?
The simple growth formula can be used to calculate the percentage of an investment's value increasing over a given time period. It is often the same period as the whole investment period. The simple growth rate, in other words, tells you how much investment will yield within the time period.
However, the compound annual rate is the average rate of return required to allow an investment to grow from its initial amount to its final value within a particular time period. CAGR does not consider the time period of an investment. You can compare investments with different time frames using the compound annual rate.
The simple growth rate formula
To calculate the simple formula for growth rate, you will need to use the following equation.
SGR = (FV - PV) / PV * 100
SGR: simple growth rate;
FV: The future value for the investment
PV: The initial balance (the investment's present value).
This example will help you understand the concept:
Consider that you had invested $1000 in May 2015 After three years, your investment was closed and you received $1300. The simple growth rate for your investment was:
SGR = (1300 - 1000) / 1000 * 100 = 30%
How do I calculate CAGR An example of CAGR calculation
These steps will help you calculate the compound annual increase rate every time you want.
Divide the consideration investment's final price by its initial cost.
Divide the result by the number of years spent in the investment period.
Subtract one from the previous result.
How to use our CAGR calculator
Do not worry if you're still unsure how to calculate growth rate. It's not as difficult as it sounds. Instead of trying to figure out complex mathematical operations, our CAGR calculator might be a better choice.
There are several ways you can use our application. You can calculate the final investment value or the growth rate using the CAGR calculator.
The CAGR you are using to determine the investment's final value is. To do this, fill the boxes with the appropriate values ( Annual Growth Rate (CAGR) ), Number Of Periods, and Initial value). The calculator will automatically calculate the final investment value.
If you wish to use the tool in reverse and calculate the growth rate, please fill out all boxes, except the first ( number of periods; initial value; final value).
Advanced mode is also available. This function lets you check the difference between the initial value and the final value, and calculates the total growth percentage.
Although the CAGR formula may seem simple, there are many uses for it. The compound annual rate formula can be used either to determine the average investment growth or to compare investment types.
There are advantages and disadvantages to CAGR
CAGR can be used to measure investment profitability. There are many benefits and drawbacks to CAGR.
These arguments can be found on the pro side:
CAGR is one of the best ways to determine the return on investment. This refers to the amount that increases or decreases in value during an investment period.
CAGR allows investors to make comparisons between investments of different time periods.
The CAGR enables you to compare the profit of a particular investment with riskless. You can also evaluate whether the premium you are paying for the risk taken has been sufficiently high.
The biggest con of the CAGR are:
CAGR doesn't take into account investment risks.
CAGR represents a smoothed increase over the investment period but doesn't reflect volatility. CAGR suggests that the rate of growth is constant.
CAGR makes it impossible to calculate the profit of an investment with both inflows and outputs during the investment period. CAGR calculates the rate-of-return only on the basis the portfolio's final and initial balance.
Parmis is a content creator who has a passion for writing and creating new things. She is also highly interested in tech and enjoys learning new things.
CAGR Calculator (compond Annual Growth Rate) English
Published: Mon May 16 2022
In category Financial calculators
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