CAGR Calculator | Annualized Rate of Return Calculator

What You'll Learn in This Guide

✅What is compound interest?
✅What is CAGR (Compound Annual Growth Rate)?
✅Simple growth rate vs. CAGR: Key differences
✅The simple growth rate formula
✅The CAGR formula and how to calculate it
✅How to use our CAGR calculator to find CAGR, the final investment value, or the initial investment value

Understanding CAGR is crucial when selecting a savings account, planning long-term investments, or evaluating business growth. Now, let's dive into the details.

What Is Compound Interest?

Before discussing CAGR, let's first understand compound interest.

In finance, compound interest is interest earned not only on the initial principal but also on the accumulated interest from previous periods. This concept allows investments to grow exponentially over time, making it more powerful than simple interest.

The Compound Interest Formula

FV = PV \times (1 + \frac{r}{m})^{m \times t}

Where:

FV = Future value of the investment
PV = Initial investment amount
r = Annual interest rate (decimal)
m = Number of times interest compounds per year
t = Number of years

If interest is compounded once per year (m = 1), then r represents the CAGR.

What Is CAGR (Compound Annual Growth Rate)?

CAGR represents the average annual growth rate of an investment, assuming profits are reinvested each year. The formula smooths out fluctuations, providing a clearer picture of investment growth over time.

However, CAGR does not represent actual year-to-year returns. Instead, it indicates the rate at which an investment would have grown if it had increased at a steady rate every year.

Why Is CAGR Important?

• It compares investments with different time horizons.
• It accounts for compounding, making it more accurate than simple growth rate calculations.
• It helps evaluate business performance, stock market trends, and financial goals.

Simple Growth Rate vs. CAGR

The simple growth rate formula calculates the total percentage increase of an investment over time:

SGR = \frac{FV - PV}{PV} \times 100

Where:

SGR = Simple growth rate
FV = Final value
PV = Initial value

Let's take an example:

💰 You invest $5,000 in 2018. By 2023, your investment grows to $7,500.

SGR = \frac{7,500 - 5,000}{5,000} \times 100 = 50\%

However, this does not account for compounding. Instead, CAGR provides a more accurate representation of annual growth.

How to Calculate CAGR

The CAGR formula is derived from the compound interest equation:

CAGR = (\frac{FV}{PV})^{\frac{1}{t}} - 1

Example Calculation

Imagine you invest $8,000 in 2017, and by 2022, the investment grows to $15,000.

CAGR = (\frac{15,000}{8,000})^{\frac{1}{5}} - 1

CAGR = (1.875)^{0.2} - 1 = 13.41\%

So, the annualized growth rate of your investment was 13.41% per year over five years.

How to Use the CAGR Calculator

If manual calculations seem complex, our CAGR calculator can quickly compute:

• The final investment value, given an initial amount and CAGR
• The CAGR, given initial and final values
• The initial investment value, given the CAGR and final value

How to Use It:

1️⃣To find the final value:
Enter CAGR, number of years, and initial investment.
The calculator will compute the final investment value.
2️⃣To find CAGR:
Enter initial investment, final value, and number of years.
The calculator will determine the compound annual growth rate.
3️⃣To find the initial value:
Enter final value, CAGR, and investment duration.
The calculator will estimate the starting investment amount.

CAGR Advantages and Disadvantages

✅ Pros of CAGR

✔Accurate investment comparison – CAGR allows comparisons between investments with different time frames.
✔Accounts for compounding – Unlike simple growth rate, CAGR shows true exponential growth.
✔Helpful for financial planning – CAGR is widely used for business growth analysis, investment decisions, and stock market evaluation.

❌ Cons of CAGR

❌Doesn't reflect market volatility – CAGR assumes steady growth, which isn't always realistic.
❌Ignores investment risk – It does not consider risks, market crashes, or fluctuations.
❌Limited representation – Short-term CAGR may overestimate growth, while long-term CAGR may underestimate it.

Example of CAGR Misrepresentation

Year	Investment Value
2016	$10,000
2017	$7,500
2018	$6,000
2019	$8,000
2020	$12,000

3-Year CAGR (2018-2020): 28.85%

5-Year CAGR (2016-2020): 3.71%

Shorter-term CAGR shows a misleadingly high growth rate, whereas the full investment period reveals more moderate growth.

Frequently Asked Questions

📌 How Do I Calculate CAGR?

Divide the final investment value by the initial value.
Raise the result to 1 divided by the number of years.
Subtract 1 and multiply by 100%.

📌 What CAGR Is Needed to Double Money in 4 Years?

A 19% CAGR is needed to double an investment in 4 years.

CAGR = (2)^{1/4} - 1 = 19.00\%

📌 Is a 7% CAGR Good?

It depends:

✔Investment Growth – Above inflation is good (e.g., stock markets average 7-10% CAGR).
✔Business Growth – If competitors grow at 10% CAGR, a 7% CAGR may be too slow.

Final Thoughts

Understanding CAGR is crucial for investment success. Whether you're analyzing stocks, planning business growth, or evaluating savings accounts, CAGR helps you make informed financial decisions.

Use our CAGR calculator to simplify your calculations and maximize your investment potential! 🚀

Ready to Calculate Your CAGR?

Try our other investment tools:

APY Calculator – Compares savings accounts and investment returns based on compounding periods.
• Rule of 72 Calculator – Estimates how long an investment will take to double at a given CAGR.
• ROI Calculator – Measures the return on investment for different financial decisions.
• Cap Rate Calculator – Helps evaluate real estate investment profitability.

CAGR Calculator – Estimate Your Investment Growth Easily