Question

Sawyer Corporation's 2017 sales were $6 million. Its 2012 sales were $3 million.

a. At what rate have sales been growing ? Round your answer to two decimal places.

b. suppose someone made this statement: Sales doubled in 5 years. This represents a growth of 100% in 5 years, so dividing 100%by 5, we find the growth rate to be 20% per year." Is the statement correct?

Answer 1

a)

Growth Rate = CAGR = [(Sales in 2016/Sales in 20120)^(1/Number of Years)]-1 = [(6/3)^(1/5)]-1 = [2^0.2]-1 = 1.148698-1 = 0.148698 = 14.87%

b)

NO, the statement is not correct.

If we take 20%, then that 20% will be on 3 million i.e. sales of 2012. For year 2013, it is logical to apply growth rate on 2912, but for all later years, logically growth rate should be applied to previous year and not the same 2012. Therefore, it wuld not be a correct way to calculate growth rate.