What is Compound Annual Growth Rate (CAGR)?
The Compound Annual Growth Rate (CAGR) is a financial metric that measures the
average annual rate of return of an investment over a specified period of time,
assuming that profits are reinvested at the end of each year. CAGR is often used
to compare the historical performance of different investments, or to project
future growth. It smooths out volatility and provides a more stable representation
of growth compared to simple year-over-year changes.
How is CAGR Calculated?
The formula for CAGR is:
CAGR = [ (Ending Value / Beginning Value)^(1 / Number of Years) ] – 1
Where:
- Ending Value: The value of the investment at the end of the period.
- Beginning Value: The value of the investment at the beginning of the period.
- Number of Years: The total number of years in the period.
Why is CAGR Important?
CAGR is a valuable tool for investors and financial analysts because it:
- Provides a standardized measure: It allows for easy comparison of investments with different time frames and growth patterns.
- Smooths out volatility: Unlike simple average returns, CAGR accounts for compounding and presents a more realistic picture of growth.
- Helps in forecasting: It can be used to estimate future investment values based on historical growth rates.
For example, if an investment grew from $10,000 to $25,000 over 5 years, its CAGR would indicate the steady annual rate at which it would have grown to reach that final value.
function calculateCAGR() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var finalInvestment = parseFloat(document.getElementById("finalInvestment").value);
var numberOfYears = parseFloat(document.getElementById("numberOfYears").value);
var resultDisplay = document.getElementById("result");
resultDisplay.innerHTML = ""; // Clear previous results
if (isNaN(initialInvestment) || isNaN(finalInvestment) || isNaN(numberOfYears) || initialInvestment <= 0 || numberOfYears <= 0) {
resultDisplay.innerHTML = 'Please enter valid positive numbers for all fields.';
return;
}
if (finalInvestment < 0) {
resultDisplay.innerHTML = 'Final investment value cannot be negative.';
return;
}
// CAGR = [ (Ending Value / Beginning Value)^(1 / Number of Years) ] – 1
var cagr = Math.pow((finalInvestment / initialInvestment), (1 / numberOfYears)) – 1;
// Format the result as a percentage
var formattedCAGR = (cagr * 100).toFixed(2) + "%";
resultDisplay.innerHTML = 'The Compound Annual Growth Rate (CAGR) is:
' + formattedCAGR + '';
}
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