The CAGR formula calculates the rate of return required for an investment or business to grow from its beginning value to its ending value over the period of time specified, assuming the growth is constant over the period. The CAGR represents the average annual growth rate over the period, and it takes into account the effect of compounding.
The formula for Compound Annual Growth Rate (CAGR) is:
CAGR = (Ending Value / Beginning Value) ^ (1 / Number of Years) - 1
Where:
Ending Value: Final value of investment or business at the end of the period.
Beginning Value: Initial value of investment or business at the beginning of the period.
Number of Years: Number of years for which CAGR is being calculated.
For example, if an investment has a beginning value of $100,000 and an ending value of $150,000 after 5 years, the CAGR would be calculated as follows:
CAGR = ($150,000 / $100,000) ^ (1/5) - 1
CAGR = 8.14%
In this example, the CAGR for the investment is 8.14%, which means that the investment grew at an average annual rate of 8.14% over the 5-year period.
CAGR is useful for comparing the performance of different investments or businesses over different time periods, as it provides a standardized way of measuring the average annual growth rate. However, it is important to note that CAGR assumes a constant growth rate, which may not always be the case in real-world scenarios.
