The compound annual growth rate is the yearly growth rate calculated using an initial value and a target value over a specified period of time, taking into account the effects of interest compounding. For example, if you wanted your business revenues to grow from $400,000 to $1 million over the next 10 years, you can calculate the annual growth rate you need to reach your goal. To get an accurate growth rate, include compounding, which is the additional interest that results from interest previously added to the account. For example, if your $1 grows at 10 percent, after the first year you have $1.10. In the second year, if you only based your growth on the first year, you would earn another 10 cents. However, if you include the interest earned in the first year, you would earn 11 cents of interest in the second year.
Subtract the ending value by the initial value to calculate the total gain. For example, if your company did $400,000 of sales 10 years ago and this year did $1 million, divide $1 million by from $400,000 to find sales increased by a factor of 2.5.
Divide 1 by the number of years over which the growth took place. For this example, since the growth occurred over 10 years, divide 1 by 10 to get 0.1.
Raise the growth factor to the power of (1 divided by the number of years) to find the annual growth factor. In this example, raise 2.5 to the 0.1 power to find that annual growth factor 1.096.
Subtract 1 from the result to find the compound annual growth rate expressed as a decimal. In this example, subtract 1 from 1.096 to get 0.096.
Multiply the compound annual growth rate expressed as a decimal by 100 to find the compound annual growth rate expressed as a percent. Completing the example problem, multiply 0.096 by 100 to find the compound annual growth rate equals 9.6 percent.
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