1. What is Compound Annual Growth Rate (CAGR)?

Compound Annual Growth Rate (CAGR) is a financial metric that provides a smoothed annual growth rate, eliminating the effect of volatility and periodic fluctuations. It represents the mean annual growth rate of an investment over a specified time period longer than one year.

2. How Does the Calculator Work?

The calculator uses the CAGR formula:

Where:

• \( EV \) — Ending Value
• \( BV \) — Beginning Value
• \( n \) — Number of years

Explanation: The formula calculates the constant rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year.

3. Importance of CAGR Calculation

Details: CAGR is widely used to compare the historical returns of different investments, analyze business growth rates, and project future growth. It provides a standardized way to measure and compare growth rates across different time periods and investment types.

4. Using the Calculator

Tips: Enter the beginning value, ending value, and number of years. All values must be positive numbers (beginning value > 0, ending value > 0, years ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What is a good CAGR value?
A: A "good" CAGR depends on the industry and investment type. Generally, higher CAGR indicates better performance, but it should be compared against relevant benchmarks and industry averages.

Q2: Does CAGR account for volatility?
A: No, CAGR smooths out volatility by providing an average annual growth rate. It doesn't reflect the actual year-to-year fluctuations in growth.

Q3: Can CAGR be negative?
A: Yes, if the ending value is less than the beginning value, CAGR will be negative, indicating a decline in value over the period.

Q4: What are the limitations of CAGR?
A: CAGR assumes a smooth growth pattern and doesn't account for intermediate cash flows, volatility, or the timing of returns. It's most useful for comparing investments with similar risk profiles.

Q5: How is CAGR different from average annual return?
A: CAGR accounts for compounding effects, while average annual return is a simple arithmetic mean. CAGR generally provides a more accurate representation of growth over multiple periods.