Eyeballing CAGR

Question

If the revenues are y1 60, y2 65, y3 70 y4 80..and you are asked eyeball the cagr without calculating it, can you assume y5 would be 90 ( since it increased by 10 the previous year and the cycle seems to repeat every 2 years..as in there was a +5 increase twice from 60-65-70, so we can assume the next pattern would be 70-80-90?) Is there a better way of doing this?

Answer 1

Hello!

I need to say that I enjoyed the question, it reminded me of those intelligence tests that we were given as kinds in school!

This said, I have never seen these type of IQ test questions in MBB or consulting in general. The type of math skill measured is other, as you can see by literally 99% of the cases you can find out there (in the PrepL library for instance).

Hope it helps!

Cheers,

Clara

Answer 2

There is no single way to do these eyeballing tricks. It depends on your mental math capabilities as well as your comfort level in doing the math during the interview.

Another approach: The revenue jumps from 60 to 80 across 3 years. That is a 33% increase. One could probably know from their multiplication tables that:

11 * 11 * 11 = 1331
OR
1.1 * 1.1 * 1.1 = 1.331
OR
(1+0.1) * (1+0.1) * (1+0.1) = 1 + 0.331
OR
(1+10%) * (1+10%) * (1+10%) = 1 + 33%

Which means that the CAGR across the 3 years is approx. 10%

So your 80 would go on to 88

In which case your approach also works well!

Answer 3

Hi there,

Please please don't look at this problem like it's a math problem in your Calculus class!

This is a business scenario. So, apply business logic.

You should assume y5 would be 10% growth not 5%. This is because your growth has clearly accelerated…in the business world you're not going to have a repeating pattern of CAGR!