This **CAGR calculator** estimates the compound annual growth rate of an investment by considering its starting deposit/initial cost, ending value & its term to grow. There is in depth information about this financial indicator below the application.

## What does CAGR stand for?

In finance,CAGR is the acronym for the Compound Annual Growth Rate which is an indicator describing the efficiency of an investment measured as a rate of return.

Its formula is:

CAGR = [ ( ( Ending value / Beginning Value ) ^ ( 1 / Term in years) ) – 1]

In regard of the interpretation of the CAGR level it should be mentioned that the higher the value is the better as this represents the year-over-year growth percent of the investment in question over a specified period of time. Please note that CAGR does not take account of any risk associated with the investment, thus when assessing a business opportunity you have to evaluate its risk profile as well.

## How does this CAGR calculator work?

The algorithm of this *CAGR calculator* uses the compound annual growth rate formula which is applied below in 3 steps:

- Divide the Ending Value by the Starting investment to get a value we note with (A).
- Raise the value obtained at the 1st step by (1 divided by the No. of years). In other words: A^(1/No. of years) – where ^ is the sign for power. Results another figure we mark with (B).
- Subtract value (A) from (B) value and get the (C) value which is then multiplied by 100 to get the CAGR percentage.

For example let’s consider the following situation:

- Starting Value = $100,000

- Ending Value = $275,000

- No. of years = 10.

1^{st} step: $275,000 / $100,000 = 2.75

2^{nd} step: 2.75 ^ (1 / 10) = 2.75 ^ 0.1 = 1.106454

3^{rd} step: (1.106454 - 1) * 100 = 10.6454%.

This tool can be used to evaluate the annual compound growth rate of a deposit and then compare it with the annual inflation rate in order to check if it worth to deposit your money in order to protect from the effect of a potential decrease in the purchasing power of money.

08 Apr, 2015 | 0 comments
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