2. The compounded annual growth rate
(CAGR) is the rate at which something
(e.g., revenue, savings, population) grows
over a period of years, taking into account
the effect of annual compounding.
A compound is composed of two or more
parts. In the case of compound growth, the
two parts are principal and the amount of
change in the principal over a certain time
period, which is called “interest” in some
circumstances.
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3. This is sometimes called “growth on growth” because
it measures periodic growth of a value that is itself
growing periodically. If we are calculating the annual
compound growth rate, then each year the new basis
is the previous basis plus the growth over the
previous period.
In looking at an investment, the CAGR is a measure
that is commonly used to show how quickly the
investment, or certain aspects of it, such as gross
sales, have been growing. Investment analysts often
look at five-year periods to discern a trend. A specific
company’s rate of growth is often then compared
with that of competitors or with the industry as a
whole.
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4. There are five variables in a compound growth
rate calculation:
Beginning value
Ending value
Length of time between the values
Periodic scale (days?, months? years?)
Periodic rate of change
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5. Say the sales of a company 4 years back was
100. Today, after 4 years, it is 200. A simple
conclusion is that sales has increases by
100% in 4 years. But does it mean that it has
increased by 25% each year? That would not
be correct, as simply dividing 100% by 4
doesn’t take into consideration the
compounding effect.
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6. A=P*((1+r)^n)
Where
A = Final Amount
P = Principal amount
r = Rate of interest, expressed in %
n = Number of years
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7. In our example,
A = 200
P = 100
r = The annual growth rate (that we want to
find out)
n = 4 years
From this formula, we find out that r is
around 19%.
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8. It means that the average growth of the
company over these 4 years, taking into
account the impact of compounding, is 19%.
In the first year, the company grew from 100
to 119. In the second year, it grew 119 to
142. In the third year, it grew by 19% from
142 to 168.5, and in the fourth year, it grew
from 168.5 to 200.
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9. it is looked at while examining at returns
generated by mutual funds (MFs).
Whenever one sees returns for more than
1 year, they are expressed in terms of
CAGR. If they are not expressed in CAGR
terms, the returns are not accurate!
CAGR should also be used while
considering any investment. Just take the
example of the very recent Bhavishya
Nirman Bonds issued by NABARD.
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10. Compound annual growth rate (CAGR) is an
average growth rate over a period of several
years. It is a geometric average of annual
growth rates:
CAGR = (ending value ÷starting value)1/(number
of years - 1 If a company had sales of £10m in
2000 and £15m in 2005 then the CAGR of its
sales is: (15 ÷10)1/5 - 1 = .084 = 8.4%
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