How to calculate CAGR easily

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CAGR sands for Compounded Annual Growth Rate. It defines as an average growth rate of an investment that compounds over a period. 

Consider the timeline of a person who invested his money for 4 years in a Systematic Investment Plan mutual fund scheme. Here is the time period depicted.



Here in the year 2010, his sales profit is 5 lakh. After 1 year, his sales figure reached 12 Lakhs. So from 2010 to 2011, his growth rate is 7 Lakh at 140% growth rate. Then from 2011 to 2012, his sales growth dropped from 12 Lakhs to 10 Lakhs. Here 2 Lakh depreciation has occurred at a percentage dip of 17 percentage. In the same way, from 2012 to 2013, a growth rate of 50 percent occurred that raised from 10 Lakhs to 15 Lakhs. Finally, from 2013 to 2014, again sales profit dropped from 15 Lakhs to 10 Lakhs at a declined rate of 33 percent.

Here, you cannot find a single average growth rate in last 4 years, due to varying nature of Sales profit. However, CAGR does. It finds out a single average growth rate.  Moreover, It determines whether your sales performance is profitable or not.

 Here is the way to calculate the CAGR.
From 2010 to 2011, your initial sales profit is 5 Lakhs. In 2011, the sales profit reached 12 Lakhs. Let us take the growth rate as r. In 2011, the sales profit is equal to 5(1+r). Similarly, from 2011 to 2012 rate can be calculated as 5(1+r)(1+r). Subsequently, for 2012 to 2013, it is 5(1+r)(1+r)(1+r) and for 2013 to 2014,  final sales profit is equal to 5(1+r)(1+r)(1+r)(1+r).

i.e. Final sales figure= 5(1+r)(1+r)(1+r)(1+r).
Final sales profit=10
i.e. 10= 5(1+r)(1+r)(1+r)(1+r).
 10=5(1+r/100)^1/4
 (1+r/100)^1/4= 10/5
 (1+r/100)=2^1/4

Therefore, r =18.92 %, which is the CAGR

In brief, this method of calculation unfolds your investment's overall performance and makes easy to plan your goals.





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