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Compound Annual Growth Rate (CAGR) Calculator

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Understanding Compound Annual Growth Rate (CAGR)

The Compound Annual Growth Rate (CAGR) is a crucial metric used to determine the average annual growth rate of an investment or any value over a specified period, assuming that the profits are reinvested each year. It smooths out volatility and provides a more representative growth rate than simple average growth rates.

Why is CAGR Important?

  • Investment Analysis: CAGR helps investors compare the performance of different investments over time, regardless of their initial size or the period of investment.
  • Business Performance: Businesses use CAGR to track revenue growth, profit growth, or customer acquisition rates over several years, providing a clear picture of their expansion trajectory.
  • Forecasting: While not a predictor of future results, CAGR can be used as a basis for making informed projections about potential future values.

How is CAGR Calculated?

The formula for CAGR is as follows:

CAGR = ( (Ending Value / Starting Value) ^ (1 / Number of Years) ) - 1

Let's break down the components:

  • Starting Value: The initial value of the investment or metric at the beginning of the period.
  • Ending Value: The final value of the investment or metric at the end of the period.
  • Number of Years: The total number of years over which the growth is measured.

Example Calculation:

Imagine you invested $10,000 in a mutual fund at the beginning of 2018. By the end of 2022 (a period of 5 years), your investment had grown to $25,000. Let's calculate the CAGR:

  • Starting Value = $10,000
  • Ending Value = $25,000
  • Number of Years = 5

Using the formula:

CAGR = ( ($25,000 / $10,000) ^ (1 / 5) ) – 1

CAGR = ( (2.5) ^ (0.2) ) – 1

CAGR = (1.2011) – 1

CAGR = 0.2011 or 20.11%

This means your investment grew at an average annual rate of approximately 20.11% over those 5 years.

Interpreting CAGR:

A higher CAGR indicates a stronger growth performance. It's essential to compare CAGR figures for investments or businesses within the same industry or asset class for meaningful comparisons.

function calculateCAGR() { var startValue = parseFloat(document.getElementById("startValue").value); var endValue = parseFloat(document.getElementById("endValue").value); var numberOfYears = parseFloat(document.getElementById("numberOfYears").value); var resultDiv = document.getElementById("result"); if (isNaN(startValue) || isNaN(endValue) || isNaN(numberOfYears)) { resultDiv.innerHTML = "Please enter valid numbers for all fields."; return; } if (startValue <= 0) { resultDiv.innerHTML = "Starting Value must be greater than zero."; return; } if (endValue < 0) { resultDiv.innerHTML = "Ending Value cannot be negative."; return; } if (numberOfYears <= 0) { resultDiv.innerHTML = "Number of Years must be greater than zero."; return; } var cagr = Math.pow((endValue / startValue), (1 / numberOfYears)) – 1; var percentageCAGR = (cagr * 100).toFixed(2); resultDiv.innerHTML = "The Compound Annual Growth Rate (CAGR) is: " + percentageCAGR + "%"; }

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