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Compounded Annual Growth Rate

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Sales for Hanebury Corporation's just-ended year were $12 million. Sales were $6 million 5 years earlier. Suppose someone calculated the sales growth for Hanebury as follows: Sales doubled in 5 years. This represents a growth of 100% in 5 years; dividing 100% by 5 results in an estimated growth rate of 20% per year.

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The question like this requires you to calculate the compounded average growth rate (CAGR). You just cannot divided the growth % by the no. of years. As per your calculation the yearly sales increases by 1.2m equally and so yearly sales are as below...

Year0 = ...

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The solution provides explanation to Compounded Annual Growth Rate calculation.

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Compounded Annual Growth Rate Associated with Each Cash Flow Stream

P3-38. You are given the series of cash flows shown in the following table.

Cash Flows

Year A B C

1 $500 $1,500 $2,500
2 560 1,550 2,600
3 640 1,610 2,650
4 720 1,680 2,650
5 800 1,760 2,800
6 1,850 2,850
7 1,950 2,900
8 2,060
9 2,170
10 2,280

a. Calculate the compound annual growth rate associated with each cash flow stream.

b. If year-1 values represent initial deposits in a savings account paying annual interest, what is the annual rate of interest earned on each account?

c. Compare and discuss the growth rate and interest rate found in parts a and b, respectively.

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