CHICA, MARK LOUIS

2CPH
ASSIGNMENT:
Give examples of each and tell us how it was used in your example
1.
2.
3.
4.

Growth rate from year 1 to year 6

Geometric mean growth rate
Arithmetic mean growth rate over a given period
What and when is the best estimate of the growth rate used?

Answers:
1.
Year
1

Revenue
$1,000,000

$1,200,000

$1,300,000

$1,400,000

$1,500,000

$1,600,000

2. Geometric Mean
Geometric Mean = ((X1)(X2)(X3)........(XN))1/N
where
X = Individual score N = Sample size (Number of scores)
To find the Geometric Mean of year 1,2,3,4,5,6
Step 1:
N = 6, the total number of values.
Find 1/N. 1/N = 0.167
Step 2:
Now find Geometric Mean using the formula. ((1M)(1.2M)(1.3M)(1.4M)(1.5M)
(1.6M)0.167 = (5.2416x1036)0.167 So, Geometric Mean = 1355659.018

3. Arithmetic Mean Growth Rate

AAGR = (Growth Rate in Period A + Growth Rate in Period B + Growth Rate in Period C +
...Growth Rate in Period X) / Number of Periods
Number of Periods= N-1
Let's look at an example. Assume that Company Co records revenues for the following years:
Year
1

Revenue
$1,000,000

$1,200,000

$1,300,000

$1,400,000

$1,500,000

$1,600,000

Using this information and the formula above, we can calculate the AAGR for the 1 st year to the 6th
year.
[Growth rate = (Ending Value - Beginning Value) / Beginning Value x 100%]
First, we calculate that the growth rate from year 1 to year 2 is ($1,200,000 - $1,000,000) /
$1,000,000 = 20%.
The growth rate from year 2 to year 3 is ($1,300,000 - $1,200,000)/$1,200,000 = 8.3%.
The growth rate from year 3 to year 4 is ($1,400,000 - $1,300,000)/$1,300,000 = 7.7%.
The growth rate from year 4 to year 5 is ($1,500,000 - $1,400,000)/$1,400,000 = 7.1%.
The growth rate from year 5 to year 6 is ($1,600,000 - $1,500,000)/$1,500,000 = 6.67%.

Next, we add the growth rates together and divide by 5: (20% + 8.3% + 7.7% + 7.1%.
+ 6.67%.) / 5 = 9.954%

4. The best growth rate used was the geometric mean method. This method is best
used for averaging rates of change or ratios. Taking the geometric mean of growth
rates, or changes, is equivalent with deriving a compounding growth rate. Using a
geometric mean is the most common way of estimating growth in economic
aggregates over a period of time