Hello!
I have asked some questions about CAGR recently, but I have decided to open a new thread because here I have more specific questions.
I will be very grateful for your help. I truly need your help and advise to get through these calculations, because I am at my wits end.
Please, take a look at the data below, my calculations, and questions. A headscratcher for me.
Goal: to find a so called average rate of Depreciation and Amortization expense for pro forma income statement. The usual computation
for this is take each year’s depreciation expense from income statement, divide by the sum of average gross ppe and average intangibles; compute average of these for each year. See excel spreadsheet I have uploaded to yandex disk.
2 approaches:
(1) Using simple arithmetic average. I show it here because it was presented in a course I was taking, and it clearly demonstrates the purpose, so you can understand what confuses me later in my calculations.
rate = ARITHMETIC AVERAGE( 31 / ( average(286,234) + average(32,18) ) , 38 / ( average(352,286) + average(25,32) ) , 52 / ( average(528,352) + average(28,25) ) , 70 / ( average(738,528) + average(33,28) ) ) = 10,9%
(2) I have also computed a geometric average.
Here is the link to the file - if you open the link you see the spreadsheet, and you can also download it to see formulas.
https://yadi.sk/i/g5O8RZWm3Btkwf
So far so good, and seems to be clear enough. But:
(3) What if any of the sums equal 0 (no matter which approach I use - geometric or arithmetic); what if the sum is zero? How in this case can I compute the overall rate; what number (ratio) should be used instead of that item, in which the denominator is zero?
For example:
what if sum2 = 0 ; then 38 / 0 is illegal; what should I use here to substitute in the overall rate equation?
(4) CAGR and geometric mean:
Usually CAGR is used to compute the growth rate, for example, of sales by using the formula:
(Final value / Initial value) ^ (1 / number of periods)
But how to apply the same formula to the data above? Is it possible?
I have tried but I get surely incorrect results.
cagr gross ppe 1.258
cagr intangibles 1.129
sum of two above 2.387
cagr depreciation 1.229
cagr depreciation / sum 0.515
Please, help me to understand this. It is so important.
Huge thanks! Lots of thanks!
EDIT: edited the format, deleted numbers and added a link to excel spreadsheet to show computations.
EDIT: took away the word growth in initial question, it might have been misleading.