Return on an Investment A business purchased for 650,000 in 2010 is sold in 2013 for 850,000. Wh

step 1 Let's say that you bought a house for $650 ,000, and in three years it was worth $850 ,000, and

Return on an Investment A business purchased for 650,000 in...

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Key Concepts

Compound Annual Growth Rate (CAGR)

CAGR is a measure used to determine the annual growth rate of an investment over a specified time period, with the assumption that profits are reinvested at the end of each period. It provides a smoothed rate that eliminates the effects of volatility in yearly returns, and is calculated using the formula: CAGR = (Final Value/Initial Value)^(1/Number of Periods) - 1.

Compound Interest

Compound interest is the process by which an investment earns interest on both the initial principal and the accumulated interest from previous periods. This concept underpins how investments grow over time, enabling the calculation of returns that take into account the effect of reinvestment, which leads to exponential growth.

Time Value of Money

The time value of money is a financial concept that recognizes the greater benefit of receiving money now rather than later due to its potential to earn interest. This principle is essential in understanding investment returns, as it emphasizes that money has different values at different points in time, requiring adjustments for the period over which an investment grows.

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