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CAGR for Annual Sales Growth

One of the practice questions in Schweser volume two is asking will the annual revenue growth rate will be higher before or after translation, these are the three years and translation rate:

Revenue:                  2014   2015   2016

                                765        820     870

Exchange Rates:     2014   2015   2016

                                1.4         1.3     1.45

The answer solves it out through CAGR of two years. My question is, why would the answer use CAGR ^ of two years not three years. And is CAGR the only way to solve out for revenue growth or we can use normal growth change=(new-old/old)

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Because we have two growth rates (over three years) the first is the growth rate from 2014 to 2015  the second is from 2015 to 2016 , so to get the compounded rate by plugging it in CAGR formula

(Ending Value/Beginning Value)(1/number of years)-1

aka 870/7651/2 -1  it should give approximately 6.64%

or alternatively by the financial calculator FV=870  PV=-765 PMT=0 N=2  solve for I  it will give you the same figure.



Best practice is using the geometric mean. Arithmetic mean is OK for ONE time period. Level 1 stuff ;)

The question of the week was posted for you! CAGR for two years vs three years.