Compound Annual Growth Rate (CAGR) Calculator
The Compound Annual Growth Rate (CAGR) is a vital metric for understanding the average annual rate of return of an investment over a specified period, assuming that profits were reinvested at the end of each year of the investment's lifespan. It smooths out volatility and provides a single, representative growth rate. CAGR is particularly useful for comparing the performance of different investments over time or for forecasting future growth based on historical data.
Understanding CAGR: The Formula and Its Significance
The formula for calculating CAGR is:
CAGR = [(Ending Value / Beginning Value)^(1 / Number of Years)] – 1
Let's break down the components:
- Beginning Value: This is the initial value of your investment at the start of the period. For example, if you invested $10,000, this would be your beginning value.
- Ending Value: This is the final value of your investment at the end of the period. If your $10,000 investment grew to $25,000 after five years, $25,000 would be your ending value.
- Number of Years: This is the duration of the investment period in years. In our example, this would be 5.
Why is CAGR Important?
CAGR provides a consistent way to measure investment performance. It helps investors:
- Compare Investments: You can easily compare the historical growth rates of different stocks, bonds, or mutual funds, even if they have different starting and ending points or varying timeframes.
- Assess Growth Trends: It helps identify whether an investment has been growing steadily or experiencing significant fluctuations.
- Set Realistic Expectations: By understanding past CAGR, you can make more informed projections about future potential returns.
It's important to remember that CAGR represents an average; actual year-over-year returns can be higher or lower. It's a smoothed-out figure that doesn't reflect interim volatility.
function calculateCAGR() {
var beginningValue = parseFloat(document.getElementById("beginningValue").value);
var endingValue = parseFloat(document.getElementById("endingValue").value);
var numberOfYears = parseFloat(document.getElementById("numberOfYears").value);
var resultElement = document.getElementById("result");
resultElement.innerHTML = "; // Clear previous results
if (isNaN(beginningValue) || isNaN(endingValue) || isNaN(numberOfYears)) {
resultElement.innerHTML = 'Please enter valid numbers for all fields.';
return;
}
if (beginningValue <= 0) {
resultElement.innerHTML = 'Beginning Value must be greater than zero.';
return;
}
if (numberOfYears <= 0) {
resultElement.innerHTML = 'Number of Years must be greater than zero.';
return;
}
var cagr = Math.pow((endingValue / beginningValue), (1 / numberOfYears)) – 1;
// Format the result as a percentage with two decimal places
var formattedCAGR = (cagr * 100).toFixed(2);
resultElement.innerHTML = '
Compound Annual Growth Rate (CAGR): ' + formattedCAGR + '%';
}
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