Compounded Annual Growth Rate Calculation With Percentages. Help!

algebra-precalculuseconomicsfinance

The Compounded Annual Growth Rate (CAGR) Formula is:

CAGR= $$CAGR=\left(\frac{Ending\:Value}{Starting\:Value}\right)^{\frac{1}{Number\:of\:Periods}}-1$$

What is the formula if the ending value and the starting value are percentages?

Ex: Starting Period Percentage =0%.

Cumulative Ending Period Percentage at the end of the 13th year= 2794.9%.

I know this evaluates to a CAGR/annual compounded rate of 29.5, but I cannot figure out how to derive this.

Thanks in advance!

Best Answer

Do the start and end percentages mean the starting and ending values are like $(1+0\%)$ and $(1+2794.9\%)$ respectively? That will give $CAGR = 29.5\%$ by your formula.

The general idea seems to be that, imagine there's a base time before the start. In a timeline:

$$\text{Base}\to \text{Start}\ \underbrace{\to \cdots \to\cdots \to}_\text{many periods}\ \text {End}$$

The starting and ending values are both grown from the base value by the given percentages:

$$\begin{align*} \text{Starting value} &= \text{Base value} \cdot (1+\text{Starting percentage})\\ \text{Ending value} &= \text{Base value} \cdot (1+\text{Ending percentage})\\ \end{align*}$$

Then the goal is to find the average growth rate per period from the starting value to the ending value, or $CAGR$:

$$\begin{align*} \text{Ending value} &= \text{Starting value} \cdot (1+CAGR)^{\text{Number of periods}}\\ (1+\text{Ending percentage}) &= (1+\text{Starting percentage})\cdot (1+CAGR)^{\text{Number of periods}} \end{align*}$$