CAGR is counted with an assumption that profits are reinvested at the end of each year of its time horizon. The formal definition of CAGR says that CAGR is the yearly rate of return that is required for an investment to grow from its initial balance to its final balance within the particular period.
t - the numbers of years the money is invested for.įrom a formal point of view, if the interest is compounded once per year (so m = 1), then r is called the compound annual growth rate (CAGR).Īs we have already explained in the introduction, CAGR is an acronym for Compound Annual Growth Rate.m - the number of times the interest is compounded per year (compounding frequency).r - the annual interest rate (in decimal).PV - the initial balance (the present value of the investment).FV - the future value of the investment.The formula for compound interest is quite complex as it includes not only the annual interest rate and the number of years but also the number of times the interest is compounded per year. Note here that a deposit or loan grows at a faster rate thanks to compounding. In other words, compound interest is the interest calculated on the initial principal as well as the interest which has accumulated during the consecutive periods. In finance, compound interest is defined as interest that is earned not only on the initial amount invested but also on any interest. To understand the idea of the compound annual growth rate, first of all, you should know what compound interest is.
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