# cagr formula

Understanding the Compound Annual Growth Rate (CAGR) Formula

The Compound Annual Growth Rate (CAGR) is a critical metric used in finance to measure the mean annual growth rate of an investment over a specified period of time longer than one year. It is especially useful for comparing the growth rates of different investments on a consistent basis. The CAGR formula is a valuable tool for investors, analysts, and corporate decision-makers to evaluate the performance of an investment or business activity. This article delves into the details of the CAGR formula, its applications, and its significance in financial analysis.

**Understanding the CAGR Formula:**

The CAGR formula is relatively straightforward, yet robust in its ability to provide meaningful insights into investment growth. The formula for calculating CAGR is:

[CAGR = left ( frac{EV}{BV} right )^{frac{1} {n}} – 1]

Where:

– EV = Ending Value of the investment or asset

– BV = Beginning Value of the investment or asset

– n = Number of years

The CAGR formula essentially measures the mean annual growth rate of an investment over a specified period of time. It smoothens out the volatility of the investment’s value over the period, providing a constant rate of growth that could have led to the final investment value from the initial value.

**Example of CAGR Calculation:**

For example, if an investment grows from $10,000 to $20,000 over a 5-year period, the CAGR can be calculated using the formula as follows:

[CAGR = left ( frac{20000}{10000} right )^{frac{1} {5}} – 1]

This yields a CAGR of approximately 0.1487, or 14.87%. This means that the investment had an average annual growth rate of 14.87% over the 5-year period.

**Significance of CAGR:**

CAGR is an important metric because it provides a more accurate view of an investment’s performance than just looking at its average annual return. The CAGR takes into account the effect of compounding, which is the process of generating earnings on an asset’s reinvested earnings. This is especially relevant for long-term investments, where the effects of compounding can significantly impact the overall growth of the investment.

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