- published: 06 Jan 2012
- views: 71369
Compounded Annual Growth rate (CAGR) is a business and investing specific term for the smoothed annualized gain of an investment over a given time period. CAGR is not an accounting term, but remains widely used, particularly in growth industries or to compare the growth rates of two investments because CAGR dampens the effect of volatility of periodic returns that can render arithmetic means irrelevant. CAGR is often used to describe the growth over a period of time of some element of the business, for example revenue, units delivered, registered users, etc.
Suppose the revenues of a company for four years, V(t) in above formula, have been:
Then the CAGR of revenues over the three-year period from the end of 2004 to the end of 2007 is:
Verification:
If you multiply the initial value by (1 + CAGR) three times (because we calculated for 3 years) you will get exactly the final value again. This is:
For n = 3:
For comparison:
In contrast to CAGR, you cannot obtain Failed to parse (Missing texvc executable; please see math/README to configure.): V(t_n)
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