How To Calculate CAGR
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How To Calculate CAGR
This video shows and demonstrates how to calculate the compound annual growth rate for investments. The use of the equation is broken down into easy to understand steps.
Hi, my name's Grant Hobson, I work as a finance analyst, and today, I'm going to talk you through some business maths calculations and ratio. How to calculate compound annual growth rate. The compound annual growth rate is, we're looking at an investment and the return on that investment.
But it's not the actual return that we get, we're looking at it from the point of view that if it had grown at a steady rate, what would we have got? So it's a theoretical amount. So effectively, what we're going is we're smoothing out the returns of the investment over the period. I'll demonstrate that now in the calculation.
In terms of the formula for the compound annual growth rate, we see that we need to take into consideration our ending value and our beginning value over whatever period we're talking about. This is then raised to the power of one divided by the number of years that we are talking about and then divided by one. So this is going to invest £8000 into our portfolio in 2005, we then see this increase up £12,000 in 2008, but in this time, the increases in the portfolio haven't been consistent.
The value of the portfolio went up to £8800 in 2006, £1000 in 2007 and ended up at £12,000 in 2008. What we are looking for now is the first section of the formula, so the ending value divided by the beginning value. So we see the ending value is £12,000 divided by the beginning value is £8000, gives us a value of 1.
5. So now what we want to do is calculate this section, the number of years. Basically, 1 over however many years we are talking about, so in this case, 3 years, equals 1 divided by 3.
We're then going to raise the 1.5 to the power of 0.33, which is this section of the equation here, which is 1.
44. We then want to take one away from it and show it as a percentage. So that's then 1.
44 less one, a percentage is 14.7%. So what we're saying is that the compound annual growth rate for this 3-year investment is 14.
7% and that represents a smoothed annualised gain that we've used over this investment. .