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Compound Annual Growth Rate (CAGR) Calculator

.calculator-container { font-family: sans-serif; border: 1px solid #ccc; padding: 20px; border-radius: 8px; max-width: 500px; margin: 20px auto; background-color: #f9f9f9; } .calculator-inputs { margin-bottom: 20px; } .input-group { margin-bottom: 15px; } .input-group label { display: block; margin-bottom: 5px; font-weight: bold; } .input-group input[type="number"] { width: calc(100% – 22px); padding: 10px; border: 1px solid #ccc; border-radius: 4px; box-sizing: border-box; } button { background-color: #4CAF50; color: white; padding: 10px 15px; border: none; border-radius: 4px; cursor: pointer; font-size: 16px; } button:hover { background-color: #45a049; } .calculator-result { margin-top: 20px; font-size: 1.2em; font-weight: bold; color: #333; padding: 10px; background-color: #e9e9e9; border-radius: 4px; text-align: center; } .error-message { color: red; font-weight: normal; } function calculateCAGR() { var startingValueInput = document.getElementById("startingValue"); var endingValueInput = document.getElementById("endingValue"); var numberOfYearsInput = document.getElementById("numberOfYears"); var resultDiv = document.getElementById("result"); var startingValue = parseFloat(startingValueInput.value); var endingValue = parseFloat(endingValueInput.value); var numberOfYears = parseFloat(numberOfYearsInput.value); if (isNaN(startingValue) || isNaN(endingValue) || isNaN(numberOfYears)) { resultDiv.innerHTML = "Please enter valid numbers for all fields."; return; } if (startingValue <= 0) { resultDiv.innerHTML = "Starting investment value must be greater than zero."; return; } if (numberOfYears <= 0) { resultDiv.innerHTML = "Number of years must be greater than zero."; return; } // CAGR formula: ((Ending Value / Starting Value)^(1 / Number of Years)) – 1 var cagr = Math.pow((endingValue / startingValue), (1 / numberOfYears)) – 1; resultDiv.innerHTML = "Compound Annual Growth Rate (CAGR): " + (cagr * 100).toFixed(2) + "%"; }

Understanding Compound Annual Growth Rate (CAGR)

The Compound Annual Growth Rate (CAGR) is a crucial metric used to evaluate the average annual growth rate of an investment over a specified period longer than one year. It smooths out volatility and provides a single, representative rate of return, making it easier to compare the performance of different investments or projects.

Why is CAGR Important?

  • Performance Measurement: CAGR helps investors understand how their investments have performed over time, abstracting away the year-to-year fluctuations.
  • Investment Comparison: It allows for a standardized comparison between investments with different growth patterns. An investment with a steady 10% CAGR is often preferable to one that fluctuates wildly, even if the latter achieves a higher absolute return in some years.
  • Forecasting: While not a guarantee of future performance, CAGR can be used as a basis for projecting future investment values, assuming the historical growth rate continues.
  • Business Valuation: Businesses often use CAGR to track revenue growth, profit growth, or customer acquisition over several years.

How to Calculate CAGR

The formula for CAGR is as follows:

CAGR = [(Ending Value / Starting Value)^(1 / Number of Years)] – 1

Let's break down the components:

  • Ending Value: The value of the investment at the end of the period.
  • Starting Value: The value of the investment at the beginning of the period.
  • Number of Years: The total duration of the investment period.

The result of this formula is a decimal, which is then multiplied by 100 to express it as a percentage.

Example Calculation

Suppose you invested $10,000 in a mutual fund at the beginning of 2019. By the end of 2023, your investment has grown to $15,000. The total period is 5 years.

  • Starting Value = $10,000
  • Ending Value = $15,000
  • Number of Years = 5

Using the CAGR formula:

CAGR = [($15,000 / $10,000)^(1 / 5)] – 1

CAGR = [(1.5)^(0.2)] – 1

CAGR = [1.08447] – 1

CAGR = 0.08447

To express this as a percentage, we multiply by 100:

CAGR = 0.08447 * 100 = 8.45%

This means that, on average, your investment grew by 8.45% each year over the 5-year period, compounded annually.

Limitations of CAGR

While powerful, CAGR has limitations:

  • It doesn't show volatility: CAGR presents a smoothed-out average and doesn't reflect the ups and downs that an investment may have experienced during the period.
  • Assumes constant growth: The formula implies steady growth, which is rarely the case in real-world investments.
  • Only considers start and end points: It ignores any intermediate performance.

Therefore, it's best used in conjunction with other financial metrics for a comprehensive understanding of investment performance.

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