Posted on July 4, 2010 - by La Papillion

CAGR II

Photo by nasrulekram

Recently, I was given an opportunity by a reader to explain more about CAGR. It’s not a brand of cigar. It’s refers to compounded annual growth rate – a calculation to find out the compounded returns per year (note that this is different from simple interest rate). I actually wanted to share how silly this calculation is about but I had a feeling that I’ve written about it donkey years ago. After searching, I realised I did write an article about CAGR here, so I’ll just highlight or perhaps add some points to it.

Frankly, I’ve not used CAGR for years because of I realised that with one calculation, the whole story can be quite distorted. Basically the calculation of CAGR depends on three variables – Future value, present value and time period. The most significant gripe I have about CAGR calculation is the fact that you can get hugely wide differences in value by just changing the variables. Essentially it boils down to a GIGO (garbage in garbage out) system where the output depends firmly on the input that you put it.

CAGR CIGAR is a stick used for smoking, giving a pleasurable feeling afterward

Take a look at this example. Let’s say these are the figures for yearly profit from year 1 to year 4 respectively:

10, 15, 20, 25

Present value: 10
Future value: 25
Time period: 3
CAGR: 35.7% per yr

Here’s another example of yearly profit from year 1 to year 4 respectively: Read more…

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