What is TCAC and what is it for?
How to evaluate the performance of an investment?
How to calculate CAGR?
What is the Compound Annual Growth Rate for?
With which formula can I compare the performance of two different investments?
What is the difference between the Compound Annual Growth Rate and the Simple Annual Growth Rate?
Everything you need to know about TCAC:
At the time of evaluate the performance of an investment or companythe Compound Annual Growth Rate (TCAC or CAGR – Compound annual growth rate) is one of the most important parameters to consider.
This metric makes it possible to express the average annual growth rate of an investment or business over a given period of time.
In this article we will explain what is TCAC, how is it calculated and how can it be used to evaluate the performance of an investment:
What is TCAC?
As we have already progressed in the introduction, the CAGR is a way of expressing the annual growth rate of an investment or business over a certain period of time.
It is calculated by taking the initial value of the investment or business, dividing it by the final value and raising the result to the power of 1 divided by the number of years. The result is expressed as a percentage.
For exampleif an investment has an initial value of $100,000 and an ending value of $150,000 after 3 years, the CAGR would be calculated as follows:
(150,000 / 100,000)^(1/3) – 1 = 0.0833 or 8.33%.
This means that the investment has grown at an average annual rate of 8.33% over the 3-year period.
How is TCAC used?
The Tasa de Crecimiento Anual Compuesto is used to evaluate the performance of an investment or business over a certain period of time.
It turns out especially useful when comparing the performance of different investments or business
For example, if two investments have the same initial value and the same final valuebut one of them has a higher Compound Annual Growth Rate, it would be considered the best investment.
TCAC or CAGR is also useful when comparing the performance of an investment or business with a reference valuelike the stock market.
For example, if an investment has a CAGR of 10% and the stock market has a CAGR of 7%, the investment is outperforming the stock market.
How to calculate the Compound Annual Growth Rate
Calculating the CAGR is relatively simple, and you can do it using the following formula:
TCAC FORMULA:
TCAC = (Final Value / Initial Value)^(1 / Number of Years) – 1
Where:
- The final value is the final value of the investment or the company.
- Initial value is the initial value of the investment or company.
- Number of years is the number of years over which the investment or business has grown
- For example, if an investment has an initial value of $100,000 and an ending value of $150,000 after 3 years, the CAGR would be calculated as follows: CAGR = (150,000 / 100,000)^(1/3) – 1 = 0.0833 or 8.33%.
⚠️ It is important to note that TCAC or CAGR is an average annual growth task, that’s why it does not take into account fluctuations in the value of the investment or company over time.
Compound Rate VS Simple Annual Growth Rate
It is important to note that the CAGR is different from the simple annual growth rate, which it is calculated by dividing the final value by the initial value and multiplying by the number of years.
The simple annual growth task it does not take into account the effect of capitalizationso the TCAC is considered a more accurate measure of growth.
Afraid exampleif an investment has an initial value of $100,000 and a final value of $150,000 after 3 years, the simple annual growth assignment would be calculated as follows:
Simple annual growth rate = (150,000 / 100,000) – 1 = 0.5 or 50%.
While the simple annual growth rate would indicate that the investment has grown by 50% over the 3-year period, the CAGR takes into account the compounding effect and shows that the investment has grown at an average annual rate of 8.33 %.
This highlights the importance of using CAGR as a more accurate measure of growth.
conclusion
In conclusion, compound annual growth rate (CAGR) is a useful metric for evaluating the performance of an investment or business over a given period of time.
It provides a way of expressing the average annual growth rate of an investment or business and is particularly useful when comparing the performance of different investments or businesses.
By understanding how to calculate and use the CAGR, investors and business owners can make more informed decisions about the performance of their investments or businesses.
You can see other articles similar to Compound Annual Growth Rate (CAGR or CAGR) explained in the section Tricks to win money