Compound Annual Growth Rate (CAGR) Calculator
What is the Compound Annual Growth Rate (CAGR)?
The Compound Annual Growth Rate (CAGR) is a financial metric that represents the average annual rate of return of an investment over a specified period of time, assuming that profits were reinvested at the end of each year of the investment's lifespan.
CAGR is a useful way to smooth out volatility and see a realistic rate of growth. It's often used to compare the performance of different investments over time, as it accounts for compounding. For example, if an investment grew from $1,000 to $5,000 over 5 years, the CAGR will tell you the average annual return rate that would have achieved this growth.
Formula:
CAGR = [(Ending Value / Beginning Value) ^ (1 / Number of Years)] – 1
Example:
Let's say you invested $10,000 (Beginning Value) and after 10 years (Number of Years), your investment is worth $25,000 (Ending Value).
- Beginning Value: $10,000
- Ending Value: $25,000
- Number of Years: 10
Using the CAGR formula:
CAGR = [($25,000 / $10,000) ^ (1 / 10)] – 1
CAGR = [(2.5) ^ (0.1)] – 1
CAGR = [1.0960] – 1
CAGR = 0.0960 or 9.60%
This means your investment grew at an average rate of 9.60% per year over the 10-year period.