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.
1st step: $275,000 / $100,000 = 2.75
2nd step: 2.75 ^ (1 / 10) = 2.75 ^ 0.1 = 1.106454
3rd 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