How to Calculate Compound Growth Rate for 5 Years

CAGR Formula:

\[ CAGR = \left( \left( \frac{A}{P} \right)^{\frac{1}{T}} - 1 \right) \times 100 \]

Compound Annual Growth Rate (CAGR):

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

The 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 one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios, and anything that can rise or fall in value over time.

2. How Does the Calculator Work?

The calculator uses the CAGR formula:

\[ CAGR = \left( \left( \frac{A}{P} \right)^{\frac{1}{T}} - 1 \right) \times 100 \]

Where:

\( A \) — Final amount (currency)
\( P \) — Principal amount (currency)
\( T \) — Time period in years

Explanation: The formula calculates the mean annual growth rate of an investment over a specified time period longer than one year. It assumes the investment grows at a steady rate each year.

3. Importance of CAGR Calculation

Details: CAGR is widely used to compare the historical returns of stocks, mutual funds, and other investments. It helps investors understand the average annual growth rate of their investments over multiple periods, making it easier to compare different investment opportunities.

4. Using the Calculator

Tips: Enter the principal amount (initial investment), final amount (ending value), and time period in years. All values must be positive numbers with the time period greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What does CAGR measure?
A: CAGR measures the mean annual growth rate of an investment over a specified time period, assuming the investment grows at a constant rate each year.

Q2: How is CAGR different from average annual return?
A: Unlike average annual return, CAGR accounts for compounding effects and provides a smoother, more accurate representation of growth over time.

Q3: What are the limitations of CAGR?
A: CAGR doesn't account for investment risk or volatility. It assumes a smooth growth path, which may not reflect actual year-to-year fluctuations.

Q4: Can CAGR be negative?
A: Yes, if the final value is less than the principal amount, CAGR will be negative, indicating a loss over the investment period.

Q5: How is CAGR useful for investors?
A: CAGR helps investors compare different investment options, evaluate portfolio performance, and make informed decisions about long-term investments.