A simple method to calculate set value using its CAGR

Thought you'd never use math once you got out of school? Think again. Today, as my first personal blog article, I am going to briefly describe a method to predict a set's worth using its CAGR.

A while ago, Ed showed us what CAGR is, and how to calculate it in this blog article (http://www.brickpicker.com/forum/index.php/blog/4/entry-15-cagr-compound-annual-growth-rate-and-lego/), but for all of you who don't want to open a five hundredth tab, CAGR, or Compounded Annual Growth Rate, is basically the rate at which a set grows compared to its original value per year. A high CAGR = a good investment, a CAGR below 10% (or even a negative number) is usually a sign that a set isn't doing so good, unless the set can maintain a low CAGR for a very long time.

Often people are aware of what the CAGR of an item is, or at least what its predicted CAGR will be for a period of years, but don't know how to apply that information to see what the value will be when the item is 1, 2, or even 10 years after retirement. With a simple equation, you can find out.

Without further ado, here is the equation:

(Orignal Value/MSRP)(CAGR - a 35% CAGR would be entered as 1.35 here)^{(Number of Years)}

The reason that a 1 has to be added in front of the 0.35 is because without it, you would be saying the set is basically dividing its value in 3 each year, which would be a negative CAGR (I'll get to that later). Now, let's work on some examples:

Assume that Set A has a MSRP of $39.99. Its predicted CAGR is 40%, and you want to know what its value will be in three years. First, substitute the values into the equation:

($39.99)(1.4)⁽³⁾

Then, calculate, remembering to always get rid of the exponent first. To work out the exponent on a calculator, punch in 1.4 and then hit the x/y key (you will need a calculator with an x/y key) and press 3. You should get an answer of 2.744:

($39.99)(2.744)

Lastly just follow through and multiply:

($39.99)(2.744)= $109.73

You're done! The answer means that if Set A continues on a 40% CAGR for the next 3 years, it will be worth $109.73 at the end of that three year period. Now I'll do one more just to make sure you all get it. Follow along with a calculator if you want and make sure you get the same answer:

Set B is worth $24.99 when it comes out. It is predicted to have a CAGR of 15%, and you want to know what it will be worth in 10 years.

($24.99)(1.15)⁽¹⁰⁾ = ($24.99)(4.045) = $101.09

Now, what happens if you are trying to calculate for a set that has a negative CAGR?

I'm not as entirely sure with this calculation as I am with the positive one, and hopefully you never have to use this one. It's hard to explains so I'll just demonstrate it:

Set C has a MSRP of $44.99, and you want to know what it will be worth in 5 years. It's predicted CAGR for those 5 years is -3.67%.

First, let's transfer that negative number into something usable. Take 100 and minus 3.67 from it. You get 96.33. Next, divide 96.33 by 100 and you end up with 0.9633 (there are other ways of doing this, but I think this is the easiest to understand). Now, you can use 0.9633 as the growth (or in this case shrink) rate. Set up the equation:

($44.99)(0.9633)⁽⁵⁾ = ($44.99)(0.829) = $37.32

I hope you all weren't to bored by all the math, but the calculation is easy and I hope it becomes of use for all of you. Now to finish off, I'm going to have a little challenge, and see who will be the first to answer:

Look up the current (May 13 Data) CAGR and MSRP of 9476 Orc Forge. If it continues at that rate for the next 2 years, what will it be worth at the end of that two year period? Happy calculating!