How do Investors Use CAGR?
Understanding the technique used to compute CAGR provides an introduction to many different methods that investors use to evaluate previous returns or forecast future profits. The formula can be algebraically adjusted to find the present or future value of money or to compute a hurdle rate of return.
Assume an investor understands they will need ₹50,000 for their child’s higher education in 18 years and have ₹15,000 to invest today. What is the required average rate of return to achieve that goal? This question can be answered using the CAGR calculation, as follows,
[Tex]Required~Return=\frac{₹50,000}{₹15,000}^{(\frac{1}{18})}-1\times100=6.90% [/Tex]
This CAGR formula is simply a rearrangement of present value and future value equation. For example, if an investor knew they needed ₹50,000 and believed it was reasonable to expect an annual return of 8%, they could use this method to determine how much they needed to invest to accomplish their objective.
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