Enter the initial value, final value, and number of periods an investment has been compounding to calculate the CAGR of that investment.
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CAGR Formula
The following formula is used to calculate the final value of an initial investment undergoing compounding interest or growth.
FV = IV (1 + (CAGR/100)/m) ^ mt
- Where FV is the final value
- IV is the initial value
- r is the rate of growth (%)
- m is the compounding frequency (assuming 1 = compounding each year)
- t is the total time invested
CAGR Definition
CAGR is short for compound annual growth rate and is a measure of the annual percentage growth of an investment or asset on an annual basis.
How to calculate CAGR
The formula above outlines how to calculate the final value of an investment, but how do you figure out the CAGR (%) given the final value and initial value? This is a little more complicated and requires some re-arranging of the formula. After some redistribution we find that the formula so solve for CAGR is the following:
CAGR = (FV / IV)1 / t – 1
How can CAGR be used?
CAGR is a measure of return on an investment that shows the rate in terms of equal return each year. It does not show the actual return rate of each year. This can be helpful in showing a true approximation of return since markets can fluctuate year to year.
Analyzing an investment on an average basis allows a individual or business to more accurately estimate the return moving forward. One year that investment might be down and the next it might be up. However, on an average basis it will return at the CAGR.
