Question

How to calculate average Annual Growth Rate

Answer 1

The empirical formula for calculating the Average Annual Growth Rate is given by:

AAGR = (Growth Rate in Period 1 + Growth Rate in Period 2 + Growth Rate in Period 3 + ... + Growth Rate in Period N) / (N - 1),

where N is the number of Periods given.

Let us see an example to make this concept clear. Let us assume that a Company XYZ records it's revenue over a period of time, say for 5 years (periods) according to the data given below:

For Year 2001, revenue collected is $1,300,000

For Year 2002, revenue collected is $1,600,000

For Year 2003, revenue collected is $1,700,000

For Year 2004, revenue collected is $1,800,000

For Year 2005, revenue collected is $1,900,000

Using the empirical formula, we calculate the growth rate for the period 2001 - 2002 as below:

growth rate for 2001 - 2002: (1,600,000 - 1,300,000) / 1,300,000 = 300,000 / 1,300,000 = 23.07 %

Likewise, for the period 2002 - 2003, growth rate will be = 6.25 %

For the period 2003 - 2004, growth rate will be = 5.88 %

For the period 2004 - 2005, growth rate will be = 5.55 %

So, the Average Annual Growth Rate will be: (23.07 + 6.25 + 5.88 + 5.55) % / 4 = 10.19 %