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

Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.

2. How Does the Calculator Work?

The calculator uses the CAGR formula:

Where:

• \( \text{End Value} \) — Final value of the investment ($)
• \( \text{Start Value} \) — Initial value of the investment ($)
• \( \text{Years} \) — Number of years for the investment period

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 period.

3. Importance of CAGR Calculation

Details: CAGR is widely used to compare the historical returns of different investments, evaluate business performance over time, and forecast future growth based on historical data. It smooths out the volatility of periodic returns to provide a clearer picture of long-term performance.

4. Using the Calculator

Tips: Enter the starting value and ending value in dollars, and the number of years for the investment period. All values must be positive numbers (start value > 0, end value > 0, years ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What is a good CAGR percentage?
A: A "good" CAGR depends on the investment type and market conditions. Generally, 7-10% is considered good for stock investments, while higher percentages indicate exceptional performance.

Q2: How does CAGR differ from average annual return?
A: CAGR accounts for compounding effects, while average annual return simply divides total return by number of years. CAGR provides a more accurate representation of growth over time.

Q3: Can CAGR be negative?
A: Yes, if the ending value is less than the starting value, CAGR will be negative, indicating a loss over the investment period.

Q4: What are the limitations of CAGR?
A: CAGR doesn't account for investment risk, volatility, or cash flows during the period. It assumes smooth, consistent growth which rarely happens in reality.

Q5: How can I use CAGR for investment decisions?
A: Use CAGR to compare different investment options, assess fund manager performance, and set realistic return expectations for long-term financial planning.