Type of calculation: Finding the compound annual growth rate (CAGR) that turns a starting value into an ending value over a number of years.
Watch out: This is NOT the total growth divided by the number of years. Growing from $10000 to $15000 is a 50% total gain, but 50% / 5 years = 10% per year is wrong, because each year's growth compounds on top of the previous year.
The formula:
CAGR = ((Ending value / Starting value) ^ (1 / Years) − 1) × 100
CAGR = (($15000 / $10000) ^ (1 /
5) − 1) × 100
CAGR = (1.5 ^ 0.2 − 1) × 100
CAGR = (1.084471771 − 1) × 100
≈ 8.45%
Check: $10000 × (1 + 8.45% / 100) ^ 5 ≈ $15000.