Question

For which of the following purposes is CAGR (Compounded Annual Growth Rate) not used?

• A. To calculate and communicate the average growth of a single investment
• B. To understand and analyze donations received by an NGO
• C. To demonstrate and compare the performance of investment advisors
• D. To compare the historical returns of stocks with a savings account

Hint:

CAGR is useful for evaluating the average growth rate of investments over time, but it’s important to remember that it assumes a consistent rate of return. It's not applicable when growth varies year by year, or when compounding doesn't occur (as in donations).

Answer 1

The Correct Option is B

CAGR, or Compounded Annual Growth Rate, is a useful metric primarily applied in the financial sector to understand the mean annual growth rate of an investment over a specified time period. It is calculated using the formula:

\[ \text{CAGR} = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{n}} - 1 \]

where \(n\) is the number of years.

The applications of CAGR generally include:

• Calculating and communicating the average growth of a single investment.
• Demonstrating and comparing the performance of investment advisors.
• Comparing the historical returns of stocks with savings accounts.

CAGR is typically not used for understanding and analyzing donations received by an NGO, as donations vary in purpose and amount yearly and are not typically assessed using a compound growth formula.

Hence, the correct answer is: To understand and analyze donations received by an NGO

Answer 2

The Compounded Annual Growth Rate (CAGR) is a financial metric used to calculate the annualized return of an investment over a period of time, assuming the profits are reinvested. It is commonly applied in the following scenarios:

Calculating the average growth of a single investment over multiple years (Option 1): CAGR helps in understanding the consistent growth of an investment over time, showing what the investment’s return would be if it had grown at a steady rate.

Demonstrating and comparing the performance of investment advisors (Option 3): Advisors often use CAGR to show their clients how investments have grown over a specific period, making it easier to evaluate the performance of different advisors.

Comparing the historical returns of various financial instruments such as stocks or savings accounts (Option 4): CAGR is commonly used to compare the average annual return of various financial products, allowing investors to make informed decisions based on past performance.

However, understanding and analyzing donations received by a non-government organization (Option 2): In the case of donations, there is no compounding or financial growth involved. Therefore, CAGR is irrelevant for analyzing such donations, as it doesn’t measure the growth of funds in this context.